US Financials lend support to Canadian Financials

Last week the financial sector dropped 5.1% amid the steepest drop in the S&P/ TSX since early March. The S&P/TSX dropped 5.2% on concerns that the economic recovery is going to be slower than previously thought. As of today, the S&P/TSX is still selling off in a number of sectors including energy and materials yet the financial sector seems to have some life left in it.

A representation of the financial sector is the Barclay’s iShares CDN Financial Sector Index Fund (XFN). It replicates the performance of the S&P/TSX Capped Financial Index through investments in the companies that make up this index. Some of the top holdings are Royal Bank of Canada (20.96%), Toronto Dominion Bank (15.94%), Bank of Nova Scotia (13.55%), Manulife Financial Corp (10.19%), Bank of Montreal (8.26%) and Sun Life Financial (5.17%).

YTD the financial sector is up 15.8%, second only to technology, which is up 47.8%. Since the double bottom in February and March of this year, the financial sector is up over 60%. On March 12, 2009 the current price crossed the 50-day moving average, on April 2, 2009 the current price crossed the 100-day moving average, and on May 20, 2009 the current price crossed the 200-day moving average. Last week the current price dropped back to the 50-day moving average and seems to have bounced off it today. Both the 50 and 100 day moving averages are in a rising trend, which is a bullish indicator, however, the 200-day is still trending downward, which could be construed as a bearish signal.
In the Globe today things appear to be positive for further movement in Financials. The article by Kevin Carmichael, “Canadian businesses adopt rosy outlook”, reported some 61% of senior mangers polled by Bank of Canada predict faster sales growth over the next 12 months, the most in records dating back to 1998. That being said, they expect credit conditions to remain tight, however a separate survey showed restrictions were mostly directed at the automotive, forestry and transportation industries and borrowing conditions are easing. Further to this, inflation is expected to be contained. This will give the financials further support. In the short term the US financials are lending support to the Canadian financials. Earnings in US Financials are expected to be out this week and Meredith Whitney, an analyst in the US, upgraded her view on Goldman Sachs driving up financials in the US today. The Globe reported, “At least the Whitney-effect crossed the border, driving Canadian financial stocks 1.4% higher.”