S&P 500, Financials, Bond Fund Flows Talking Points:
- The S&P 500 retreated from its all-time highs, but is higher again on Wednesday.
- XLF Financials ETF shows little reaction to strong bank earnings.
- Treasury ETFs have seen an increase in inflows in recent days.
S&P 500, Financials, Bond ETF Flows After Strong First Quarter Bank Profits
The S&P 500 Index hit a new all-time high in mid-April around the 4,180 level. As the week of April 19e started, the index fell lower, falling back to the 4,120 level before rising higher on Wednesday. First quarter earnings reports continue to be generally strong, and the brief bout of risk aversion seen earlier in the week could be nothing more than profit taking at record highs.
S&P 500 Index – 45 minute delay (March – April 2021)
Chart created by Izaac Brook: Source: TradingView
The results season started with Strong Q1 earnings outperform JP Morgan, Goldman Sachs and Wells Fargo. Bank profits were boosted by strong trading income, reductions in loan loss reserves and better than expected economic performance in the United States. New strength appears to be on the horizon as the economy continues to reopen.
The XLF Financial Sector ETF hit a new all-time high alongside these strong earnings reports, but has since fallen slightly alongside the decline in the S&P 500 index as a whole. Meanwhile, flows to the ETF remain moderate and mixed. The ETF saw large inflows in January, February and March as US yields rose, but since peaking around 1.77% at the end of March, yields have risen. moved back.
With yields being a major driver of financial sector earnings, a continued pause in upward moves or a downward pullback will threaten the ability of the financial sector to post equally impressive numbers in the second quarter.
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The pause in yield increases since the end of March has had a similar impact on Treasury ETFs. Overall fund flows for TLT, BIL and GOVT ETFs remained mixed in 2021. After larger outflows in late February coinciding with surging yields, flows remained relatively calm. In recent days, inflows have been concentrated as yields have remained broadly stable.
Since the end of the first quarter, negative sentiment towards Treasuries has been waning, with market holdings closing their short positions and instead taking long positions. Future movements in Treasury yields are likely to be tied to the path of economic reopening and the Federal Reserve’s policy decisions.
the The Bank of Canada has announced a gradual reduction in its QE purchases Wednesday, and many suspect that the Fed will also go down this path before the end of the year. While the next FOMC meeting in April is probably too early to talk about the phase-down, the June or July meetings could see such a discussion begin.
— Written by Izaac Brook, DailyFX Research Intern