Miners: The Best Way To Play A Rate Hike?
Fed tightening will likely lead to weakness in the U.S. dollar. Historically, commodity prices have outperformed in the six month following the first rate hike of a tightening cycle.
The latest U.S. economic numbers make the case for an imminent Fed rate hike even stronger. The question on all traders minds is how to play rising interest rates. Although conventional belief is that financials are the major beneficiaries of higher rates, Credit Suisse recently discussed another approach to trading a Fed rate hike.
The Idea
According to a new Credit Suisse report, the first Fed rate hike will likely put an end to the U.S. dollar rally. Historically, the dollar has performed weakly after the beginning of the past five rate hike cycles.
The Impact
As a result, commodity prices will likely find some much-needed support following the first U.S. rate hike. In the following 1/3/6 months we tend to see the Commod sectors (particularly the Miners) outperform [...] as one would expect with a weaker USD and the positive translation to Commod pricing, Credit Suisse explained.
Related Link: How Have Bank Stocks Traded During The Last Three Fed Tightening Cycles?
Why Not Banks?
In theory, rising rates should provide a boost banks' bottom lines. A large part of banks profits comes from the spread between the interest they collect from long-term loans and the interest they pay on short-term debt. While a rise in interest rates across the board doesnt necessarily improve this spread, it theoretically gives banks more wiggle room when it comes to their net interest margins (NIM), which have been declining steadily in recent years.
However, history shows that bank stocks have not performed particularly well during tightening cycles.
A Better Alternative?
According to Credit Suisse, instead of buying banks, traders should be looking for battered mining stocks to play the rate hike. The SPDR S&P Metals and Mining (ETF) (NYSE:XME) is down 50.0 percent in 2015. Top holdings AK Steel Holding Corporation (NYSE:AKS), Alcoa Inc (NYSE:AA) and Carpenter Technology Corporation (NYSE:CRS) are all down more than 35.0 percent this year.
Disclosure: The author holds no position in the stocks mentioned.
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