NEW YORK • As 2015 draws to a close this week, the fortunes of the last few trading days of the year may be dictated by the direction of the financial sector.
The financials have risen more than 6 percent this quarter, with investors expecting the sector to be one of the main beneficiaries of the first interest rate hike by the Federal Reserve in nearly a decade.
However, the potential exposure of banks to the energy-dominated U.S. high-yield corporate bond markets has unnerved investors, and caused financial and energy shares to stall during the two trading sessions that followed the hike. Stocks in both those sectors have been closely correlated in recent weeks.
"That trade, the oil-financials, it is going to be with us for quite some time," said Peter Kenny, equity market strategist at Kenny & Co. LLC, in Denver.
The benchmark S&P 500 index has rallied nearly 3 percent last week, buoyed by a jump of nearly 5 percent in the energy sector as oil prices bounced off multi-year lows. Financial stocks, meanwhile, have surged more than 3 percent last week.
In recent weeks, energy stocks have been tightly correlated to the price of crude at 0.95, which means they have moved in sync with each other, and financials have not been far behind. The 20-day correlation between the financial sector and U.S. crude is 0.75.
Should oil prices fail to stabilize and energy shares continue to fall, that could be reflected in the financials.
"The influx of money and capital into the financials over the last six months in anticipation of this move by the Fed was justified, but boy, this oil trade has turned that upside down," Kenny said.
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