Australian Financial sector was the top gainer on ASX; Here why?

Key Takeaways:

• Australian financial sector was the top gainer on ASX, delivering growth of 2.45%.
• The Big 4 banks in Australia noted an increase in the share price, reflecting the positive investor sentiment impending 25 basis points increase in the interest rate by the US Federal Reserve.

On 14 March 2022, the Australian financial sector was the top gainer on ASX today, delivering growth of 2.457% in the index value. The Australian financial sector is the biggest contributor to the Australian economy. It supported major banks during the pandemic period to lift cash profits by ~55% compared to FY2020.  Australia’s robust, stable, innovative, and profitable banking sector played a key role in improving the impact of fiscal & monetary policy throughout the challenging COVID-19 environment.

The performance of the Australian financial sector on 14 March 2022, was majorly driven by the performance of the big 4 banks in Australia during the day. On 14 March 2022, the big four banks, namely Australia and New Zealand Bank (ASX: ANZ), National Australia Bank (ASX: NAB), Commonwealth Bank (ASX: CBA), and Westpac, surged up on ASX. On the other hand, diversified financial company Magellan Financial Group Limited (ASX: MFG) noted a drop in its shares after releasing its fund under management update.

Why did Australian bank shares surge on ASX?

The increase in the share price of the bank stocks on ASX reflects the positive investor sentiment of the impending 25 basis points rise in the interest rate by the US Federal Reserve. The US Federal Reserve is set for the second FOMC meeting scheduled on March 15 and 16. At present, the inflation rate in the US has hit its 40-year high. This is the biggest surge in consumer prices since 1982.

During Congressional testimony during the beginning of March 2022, Fed Chair Jerome Powell highlighted that it is important to raise the target range for Federal funds. The Fed intends to increase the fund rate from zero to a quarter percentage.

Based on these ongoing developments, there is a possibility that there might be an increase in the interest rate by the Australian central bank as well.

Significance of increased interest rate:

Interest rate and bank profitability are directly linked to each other. The rise in the interest rate helps banks make additional money by taking advantage of the difference between the interest rate it offers to its clients and the interest it can make by investing in it. 

In the recent result declared by these four banks, the impact of low-interest rate impacted their net interest margin. However, with this increase in the interest rate, it seems that the investors are optimistic to see an improvement in the net interest margins.

RBA will be having its Monetary policy meeting on 15 March 2022.

What changes can we expect in the coming period?

Amid the ongoing uncertainty due to the Russia-Ukraine war and lack of clarity in terms of tenure the war will last, the market across the globe might remain volatile. This week, Powell’s statement will be closely monitored for guidance on how the central bank looks at the Russia-Ukraine war crisis and to what extent it would impact the outlook and path of the interest rate.

Further, Russia is amongst the biggest commodities producer. Its attack on Ukraine has increased the prices of commodities, oil, and gas. Experts believe in the possibility of a further increase in commodity prices during this month.

The rising inflation rate may be possible to keep Federal Reserve on track to increase the interest rate.

What next?

As Federal Reserve is ready for the second FOMC meeting, it would be exciting to see how the banking stocks and other players from the financial sector perform in the coming period.

Customer Notice:

Nextgen Global Services Pty Ltd trading as Kapitales Research (ABN 89 652 632 561) is a Corporate Authorised Representative (CAR No. 1293674) of Maven Capital Pty Ltd (AFSL No. 418504). The information contained in this article is general information only. Any advice is general advice only. No consideration has been given or will be given to the individual investment objectives, financial situation or needs of any particular person. The decision to invest or trade and the method selected is a personal decision and involves an inherent level of risk, and you must undertake your own investigations and obtain your own advice regarding the suitability of this product for your circumstances. Please be aware that all trading activity is subject to both profit & loss and may not be suitable for you. The past performance of this product is not and should not be taken as an indication of future performance.

Kapitales Research, Suite 1A, Level 2, 802-808 Pacific Highway, Gordon NSW 2072, Australia | 1800 005 780 | info@kapitales.com.au