Banks start the year with a pullback

FXCM's US.BANKS basket has risen strongly since its low in mid-October last year. However, the strong appreciation resulted in an overbought condition to start 2024 (red vertical). As a result, it not a surprise to see the basket pulling back over the last week and a half as the oscillator normalises.

Despite its decline, US.BANKS remains in good shape on a technical basis. It is trading above its black 30-week EMA, with the EMA still pointing up. Moreover, the RSI remains above 50, which is the bullish side of the oscillator. If it remains above 50, there will be an underlying bullish momentum that will tend to be basket supportive.

This year will be important for banks as the tension between interest rates and bank profitability plays out. Markets expect interest rates to decline in 2024 and this may act as a headwind to bank bottom lines in the short-term.

Over the last two years interest rates have headed higher resulting in rising net interest income for banks. However, the Federal Reserve cutting interest rates this year may lead to some pressure on bank earnings as the interest they earn on loans decrease. If the funding costs fall at a slower rate, one may expect pressure to mount.

Over a longer-term perspective, the decline in interest rates may benefit banks if these translate to higher mortgage and loan issuance. However, the road ahead may not be smooth sailing.