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For the third straight day, financials led the S&P 500 as traders ramped up expectations on Wednesday for a Fed interest-rate increase next month.

The S&P 500 financials index rose 0.7 per cent, helping push the broader benchmark index 0.3 per cent higher to 2,343.81. That comes on top of a 1.4 per cent gain for financials on Tuesday and a 1.1 per cent rise on Monday, taking the sector’s year-to-date advance to 5.1 per cent.

The moves come as an uptick in inflation and retail sales at the start of the year saw the odds of a rate rise in March jump to 42 per cent, from 34 per cent on Tuesday. Higher rates benefits bank’s net interest margins — the spread between the rates at which banks borrow and lend money — which is a key measure of bank profitability.

Shares in financials first began to pick up steam at the end of last year. They rose 20 per cent in 2016 to finish as the second-biggest gainer among the 11 major sectors on the S&P 500 after Donald Trump won the presidential election in November.

Expectations that Mr Trump’s stimulus plan would drive growth and stoke inflation — in turn accelerating the Fed’s rate rise cycle — helped drive up bullish sentiment on banks, as did his calls to roll back the Dodd-Frank financial reform law passed in 2010.

On Wednesday, during her testimony to the House Financial Services Committee, however, Federal Reserve chair Janet Yellen continued to defend a ban on banks’ proprietary trading outlined in the so-called Volcker Rule, which is part of Dodd-Frank.

Copyright The Financial Times Limited 2017. All rights reserved.
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