No area of the stock market benefited more than financials following the Federal Reserve’s most recent comments.
Now traders are betting the group’s climb to the highest level in a decade has a ways to go.
An index of financial stocks climbed as much as 1% on Wednesday, with the majority of those gains coming immediately after the Federal Open Market Committee (FOMC) announced that it will slowly begin the long-awaited unwinding of its balance sheet next month.
The gauge finished the day up 0.6%, at its loftiest point since 2007, amid optimism that an eventual rate hike will boost interest income for firms.
Looking ahead, bullish sentiment is continuing to swell in financials. Following the Fed statement, an exchange-traded fund tracking the sector saw outstanding call contracts — or wagers that an asset’s price will rise — climb to the highest since December, relative to bearish puts, according to data compiled by Bloomberg.
Drilling down specifically into bank stocks, which make up a significant portion of the financial group, bullish sentiment also abounds. On Wednesday, the most heavily-traded contract of an ETF tracking banks was a call option betting on a 5.3% increase from the previous day’s close by December 15.
And wouldn’t you know it, that lines up in nearly perfect fashion with a December 13 Fed interest rate decision.
That date is particularly significant because now, after Wednesday’s FOMC comments, economists think the central bank has a 63.8% chance of hiking rates, according to Bloomberg’s World Interest Rate Probability data. That’s a pretty hefty increase from the near 20% forecast from two weeks ago.
Still, the post-Fed strength in financials didn’t exactly come out of nowhere. The group was already climbing towards new all-time highs before the central bank’s statement, likely on expectation that they’d get hawkish guidance.
Now the wait begins for the Fed’s next move — one increasingly saddled with trader expectations.
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