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Financials slide as ‘Trump trade’ begins to cool

US financial stocks have come under pressure since the start the year, denting a sharp rise that began after the election, in the latest sign that the Trump trade has begun to run out of steam.

The S&P 500 financial sector has fallen 1.1 per cent since the end of 2016, bucking the broader index that has risen by 1.4 per cent.

While the financial index was up modestly on Wednesday, it tumbled by 2.3 per cent in previous trading session, notching its worst day since the aftermath of the June Brexit vote.

The bout of weakness comes as cracks appear in one of the biggest post-election advances in history. Fuelled by hopes of infrastructure spending, lighter regulation and lower taxes, investors embraced US equities since the November election, propelling all major stock indices to fresh highs.

“People are starting to realise, ‘Hey, this may not all come through,’” said Peter Tchir, managing director at Brean Capital. “The Trump rally is fading and it feels like bank stocks got ahead of themselves.”

Financial stocks were one of the main beneficiaries of the post-election rally in equities. Since the November election to the end of 2016, the KBW Bank index rose by more than a fifth while the financial sector of the S&P 500 increased 16.5 per cent.

But a degree of scepticism has emerged about how quickly and dramatically the incoming administration will be able to strip back financial regulation.

Attention has focused on marquee regulation passed after the financial crisis, such as the Volcker rule, which prevents banks from proprietary trading, or the Dodd Frank Act.

While recent earnings reports showed that large banks benefited from an uptick in trading volumes after the election, the news has presented an opportunity for profit-taking.

Goldman Sachs, the New York investment bank, reported better than expected profits on the back of a nearly 80 per cent surge in bond-trading revenue on Wednesday.

But the shares still struggled, declining 0.4 per cent at midday to $234.82.

Analysts from KBW also downgraded shares of JPMorgan this week. The bank on Friday reported a near doubling of profit in its investment banking division.

“We continue to believe that JPMorgan is a high-quality bank but our outperform thesis for JPM focused on the potential to improve returns, and we believe the current share price captures that return improvement JPM could achieve in the near term,” KBW analysts said.

In another indication of a reversal under way beneath the surface of the stock rally, defensive sectors that had fallen out of favour after the election have notched modest rebounds this year.

Both the utilities and consumer staples sectors have tacked on 1.2 per cent since the end of 2016.

The yields on Treasury bonds — haven assets that performed well amid historically low interest rates — have also reversed some of their post-election rise.

The benchmark 10-year note yielded 2.37 per cent on Wednesday, compared with highs of 2.6 per cent in December, and 1.8 per cent ahead of the victory by Donald Trump.

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