Equities fell this week, on worries that the US Federal Reserve is contemplating raising interest rates again in June – earlier than markets expected. While the resulting stronger dollar dealt a blow to commodities prices and their miners/drillers not everyone lost out. The banks rallied. But why?

First of all, the prospect of higher US interest rates is a boon for banks whose profitability has suffered in the post-financial crisis era of low (in some cases even negative) interest rates. Remember how banks earn their crust. They charge more on what they lend versus what they pay on deposits. And the fractional reserve banking model allows them to lend multiples of what they have on deposit.

With many important interest rates (LIBOR etc) linked to US rates any increases will allow banks to charge more. They may even encourage people to save more to earn more which should in turn allow banks to do more business. Making more profits. To pay higher dividends. All good. Especially for the UK’s banks as they turn back towards profitability.

And for one bank in particular this could be great news. That bank is Lloyds. Because this week’s sector strength has seen its shares get back to the key 70p level. Just a few pence sky of that 73.6p hurdle they need to clear for the Chancellor George Osborne to launch his 5% discounted £2bn share sale. We wrote about this back in March when the shares rallied on news of a special dividend to trade back at the breakeven bailout price that allows George to pull the trigger and sell the UK government’s remaining stake. Could renewed excitement get the shares back there next week?

Another driver that has helped both Banks and property names this week was a shift in Brexit polls suggesting the ‘Remain’ camp taking a decisive lead in the UK’s referendum on EU membership. This has helped remove some uncertainty related to the issue and relieve fears that UK financials were set for a showdown with Europe and that property prices would suffer as a result. Look at the names topping the UK Index leader board this week. Financials and Property dominate. Is there a trade to be had here next week if ‘Remain’ further extends its lead and Fed speakers persist with their talk of a June hike?

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Mike van Dulken, Head of Research, 20 May