JPM, BAC, Financials – Unattractive.

Utilities (XLU), staples (XLU), healthcare (XLV), and real estate (XLRE) were the worst performers. These sectors perform well in the declining phases of the business cycle and underperform in the rising phases of the business cycle.

Source: StockCharts.com, The Peter Dag Portfolio Strategy and Management

Financial stocks performed well because they outperform the market during the rising phase of the business cycle. The reason for this outperformance was the strengthening of the business cycle since March 2020. This important pattern was reviewed in my article “Bank Stocks, Interest Rates, And Business Cycles – Not That Obvious (March 25, 2021)”.

There have been important changes in the economy and in our business cycle indicator to suggest some adjustments to the outlook for financials and bank stocks.

Chart, pie chartDescription automatically generated
Source: The Peter Dag Portfolio Strategy and Management

The downturn of the business cycle (Phases 3 & 4) reflects a significant slowdown in business activity. This is the time when portfolios should avoid cyclical sectors and be overweight defensive sectors and bonds as I discussed in my article here.

The decline of the business cycle is anticipated by a rise in commodities and inflation. The reason is these trends undermine consumers’ purchasing power. The resulting slowdown in demand is not recognized at first by business which remains mainly focused on replenishing inventories. Production must be increased to meet sales growth.

Eventually, because of slowing demand, inventories start rising faster than sales. The decision must be made to reduce production to cut inventories.

The reduction in production requires a cut in working hours. The cut in working hours is followed by layoffs, reduction in purchases of raw materials and borrowing to finance operations.

The forces unleashed by the inventory correction are visible in slower growth in manufacturing employment, declines in commodity prices, and lower yields.

This transition from Phase 2 to Phase 3 has major strategic importance for investors. Stocks outperforming during the strong phase of the business cycle (such as industrials) start disappointing because of the uncertain outlook for their profits. The defensive sectors (such as utilities), on the other hand, begin to outperform as investors choose them for their reliable profitability.

The following chart reviews the performance of the financial stocks (XLF) with the updated version of our business cycle indicator.

Source: StockCharts.com, The Peter Dag Portfolio Strategy and Management.The above chart shows the ratio of XLF (financials) and SPY (S&P 500). XLF outperforms SPY when the ratio rises. XLF underperforms SPY when the ratio declines. Investors should be overweight financial stocks when the ratio rises and be underweight financials when the ratio declines.

The lower panel of the chart shows the business cycle indicator, a proprietary indicator updated in each issue of The Peter Dag Portfolio Strategy and Management. The graphs show the best time to own financials is when the business cycle indicator rises, reflecting a strengthening economy.

The business cycle indicator has been declining, as discussed also in previous articles. A likely continuation of the declining of the business cycle indicator points to underperformance of the financial stocks.

The following chart shows how the banking sector, a subset of the financial sector, performs during a complete business cycle.

The above chart shows the ratio of KBWB and SPY. The Invesco KBW Bank ETF (KBWB) normally invests at least 90% of its total assets in companies primarily engaged in US banking activities. KBWB outperforms SPY when the ratio rises. KBWB underperforms SPY when the ratio declines.

The above graphs show KBWB performs like XLF during a business cycle. The time to be overweight in KBWB is when the business cycle indicator (lower panel) rises, reflecting a strengthening economy. Investors should be underweight bank stocks when the business cycle indicator declines, reflecting a weakening economy.

Do regional banks perform differently from financial and bank stocks?

Source: StockCharts.com, The Peter Dag Portfolio Strategy and ManagementThe upper panel of this chart shows the ratio of KRE (regional banks) and SPY. The chart shows regional banks become unattractive (the ratio declines) when the business cycle declines, reflecting a weakening economy.

Are large money-center banks immune to the forces of the business cycle?

Source: StockCharts.com, The Peter Dag Portfolio Strategy and Management

The ratio of JPM (JP Morgan) and SPY (upper panel) rises when the business cycle indicator (lower panel) rises, reflecting a strengthening economy. JPM underperforms SPY (the ratio declines) when the business cycle indicator declines, reflecting a weakening economy.

JPM, a major money center bank, is responding to changes of the business cycle like the overall financial stocks (XLF), bank stocks (KBWB), and regional bank stocks (KRE).

Source: StockCharts.com, The Peter Dag Portfolio Strategy and Management

Bank of America (BAC) is also a money-center bank responding to the business cycle. The upper panel shows the ratio of BAC and SPY. BAC is also outperforming the market (SPY) when the business cycle rises. It underperforms the market when the business cycle declines, reflecting a weakening economy.

Key takeaways

  • Because of sharply rising inflation the business cycle is transitioning from Phase 2 to Phase 3.
  • Financials and bank stocks will continue to underperform the market (SPY) as long as the business cycle indicator declines.
  • Financial stocks and bank stocks will start outperforming the market (SPY) when the business cycle transitions from Phase 4 to Phase 1. This transition will be anticipated by sharply lower inflation.
  • Long-duration Treasury bonds will continue to provide total returns outperforming the returns from SPY as long as the business cycle indicator declines, as discussed in previous articles.

Bond Buying Flows Surge as Funds Reverse Reflation Bets – BofA

BofA’s number crunchers who analyse weekly investment flow figures from EPFR said funds had bought $8.4 billion worth of bonds overall including $2.6 billion of U.S. government bonds.

The figures cover the week up to Wednesday and therefore the powerful rally in bond markets on Monday when the resurgence in global COVID cases seemed to suddenly ignite fears about the likelihood of economies being able to return to normal.

There had also been the largest withdrawal from U.S. stocks in 6 weeks at $2.6 billion and the largest outflow from European stocks and gold since March at $700 million and $1 billion respectively.

It hasn’t been all gloom though. BofA estimated that funds have pumped $3.3 billion into stocks worldwide, although the fact $1.6 billion went into tech and $1.5 billion went into healthcare stocks again highlights the virus’ impact.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Marc Jones; Editing by Saikat Chatterjee)

 

Marketmind: “A Ways Off” and That’s Good

You couldn’t call China’s data dismal — average growth actually surpassed Q1 while June retail sales and industrial output beat expectations. But it does show authorities, who last week unleashed one trillion yuan into the financial system, will ensure conditions stay loose.

But markets’ delight after Powell told Congress he saw no need to rush the shift towards tighter post-pandemic monetary policy, has not lasted long.

World stocks are off recent record highs, tempered possibly by spiking COVID-19 cases across Asia and signs the post-pandemic bounce in company earnings is hitting a peak.

Asian shares rallied, led by a 1% rise in Shanghai but U.S. futures are mostly lower, with the exception of the tech-heavy Nasdaq. European markets too, are opening weaker and 10-year Treasury yields are down at 1.33%, almost 10 basis points off Wednesday’s high point.

The news from the corporate world is all good — the four biggest U.S. banks, Wells Fargo, Bank of America, Citigroup and JPMorgan have posted a combined $33 billion in profits. Asset manager BlackRock beat estimates, with assets at a record $9.5 trillion.

Omens in Europe are good too, with Sweden’s SEB, carmaker Daimler and food delivery firm Just Eat all reporting buoyant earnings. And earlier in Asia, Taiwanese chipmaker, TSMC, posted an 11% rise in Q2 profits.

Key developments that should provide more direction to markets on Thursday:

– South Korea held rates but signalled pandemic era record-low interest rates was coming to an end

-UK added 356,000 jobs in June

-ECB Board Member Frank Elderson speaks

-Philly Fed index

-Bank of England interest rate-setter Michael Saunders speaks

Fed events: Powell testimony continues, Chicago Fed President Charles Evans speaks

US earnings: BNY Mellon, Charles Schwab, US Bancorp, Morgan Stanley, Alcoa

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Sujata Rao; editing by Dhara Ranasinghe)

 

Bank of America shares Dips After Less Than Impressive Q2 Revenue

The shares of Bank of America are trading in the red zone today after the financial institution reported revenue lower than what was expected.

BAC Shares Down By 1.85%

The shares of Bank of America are down by 1.85% at Wednesday’s pre-market trading session. This comes after the bank presented an earnings report that was lower than what analysts had estimated.

According to its earnings report, the Bank of American generated $21.6 billion in the second quarter of 2021, falling below the $21.8 billion estimated by market experts. Furthermore, its earnings were $1.03 a share, including a $2 billion tax benefit. Regardless, the Bank of America presented earnings per share (EPS) of 80 cents, surpassing the 77 cents estimated by market analysts.

Following this presentation, the shares of the financial institution dropped. At the time of this writing, BAC is down by 1.85% and is trading around $39.88 per share. Year-to-date, the bank’s shares have been performing excellently. BAC began the year trading at $30.03 but is up by nearly 30% to currently trade close to the $40 mark.

BAC stock chart. Source: FXEMPIRE

Low-Interest Rate Causes Revenue To Decline

The bank stated that revenue is down by 4% from the same quarter in 2020 due to the 6% drop in net interest income caused by lower interest rates. The Bank of America also explained that lower trading revenue and the lack of a $704 million profit last year also affected its revenue.

This latest development shows that falling interest rate affects the performances of financial institutions. Due to the pandemic, banks had to gather deposits and extend loans, with the declining interest rates squeezing the margin between the amount they pay depositors and charge the borrowers.

The Bank of America recorded a net interest margin of 1.61% in the second quarter of the year, down by 26 basis points from the previous year.

Marketmind: It’s Jay Time!

Inflation in the world’s top economy barrelling ahead for a third straight month has doused the equity rally, just as stocks were staging a come-back after navigating last week’s bond market volatility.

Powell will face questions on how transitory price pressures might be and how fast the Fed might need on withdrawing the monetary support which has been critical for markets.

Wednesday’s figures prompted markets to bring forward the timing of the Fed’s first rate hike, bets that lifted the dollar to a three-month high versus the euro and a one-week high versus the yen.

An added complication was weak demand at Wednesday’s auction of 30-year Treasury bonds, which pushed 10-year yields above 1.4%. And after a softer Wall Street close, Asian stocks fell while European and U.S. markets are tipped to open lower.

Price pressures are a hot topic elsewhere too, with data showing British inflation rising further above the Bank of England’s target, hitting 2.5%.

Some central banks, meanwhile, are going full steam ahead with stimulus withdrawal plans — New Zealand announced a halt to its pandemic-linkd QE programme. Bets on a rate hike this year have sent the Kiwi dollar surging 1%.

Later in the day, the Bank of Canada is also expected to announce plans to taper asset purchases.

Key developments that should provide more direction to markets on Wednesday:

-UK inflation jumps to 2.5% in June

-Bank of Canada expected to taper

-New Zealand c.bank ends bond purchases, paves way for possible rate hikes

-Turkey, Chile and Croatia central bank meetings

-India WPI inflation

-Swedish CPI

-Euro Area Industrial Production

-ECB Board Member Isabel Schnabel speaks

-Bank of England Deputy Governor Dave Ramsden speaks

-Auctions: German 10-year Bund

-Earnings: Citi, BofA, BlackRock, Wells Fargo, Delta Airlines

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Karin Strohecker; editing by Sujata Rao)

S&P 500 and Nasdaq End Down After Hitting Record Highs

The S&P 500 and Nasdaq reached fresh record highs but quickly fell into negative territory after an auction of 30-year Treasuries showed less demand than some investors expected and pushed yields higher.

Data indicated U.S. consumer prices rose by the most in 13 years last month, while so-called core consumer prices surged 4.5% year over year, the largest rise since November 1991.

Economists viewed the price surge, driven by travel-rated services and used automobiles, as mostly temporary, aligning with Federal Reserve Chair Jerome Powell’s long-standing views.

“Any time you get an uptick in interest rates the stock market is going to get nervous, especially on a day like today,” said Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey.

The S&P 500 growth index dipped 0.05%, while the value index fell 0.70%.

“With growth outperforming value, the takeaway is clearly that inflation from a market perspective is not a real threat in the long term,” said Keith Buchanan, a portfolio manager at GLOBALT Investments in Atlanta, Georgia.

Ten of the 11 major S&P 500 sector indexes ended lower, with real estate, consumer discretionary and financials each down more than 1%.

JPMorgan Chase & Co stock fell 1.5% after the company reported blockbuster quarterly profit growth but warned that the sunny outlook would not make for blockbuster revenues in the short term due to low interest rates.

Goldman Sachs Group Inc dipped 1.2% after its quarterly earnings exceeded forecasts.

Citigroup, Wells Fargo & Co and Bank of America were due to report their quarterly results early on Wednesday.

PepsiCo Inc gained 2.3% after raising its full-year earnings forecast, betting on accelerating demand as COVID-19 restrictions continue to ease.

June-quarter earnings per share for S&P 500 companies are expected to rise 66%, according to Refinitiv data, with investors questioning how long Wall Street’s rally would last after a 16% rise in the benchmark index so far this year.

All eyes now turn to Fed Chair Jerome Powell’s congressional testimony on Wednesday and Thursday for his comments about rising price pressures and monetary support going forward.

The Dow Jones Industrial Average fell 0.31% to end at 34,888.79 points, while the S&P 500 lost 0.35% to 4,369.21.

The Nasdaq Composite dropped 0.38% to 14,677.65.

Conagra Brands Inc dropped 5.4% after the packaged foods company warned that higher raw material and ingredient costs would take a bigger bite out of its profit this year than previously estimated.

Boeing Co fell 4.2% after the Federal Aviation Administration said late on Monday some undelivered 787 Dreamliners have a new manufacturing quality issue.

Declining issues outnumbered advancing ones on the NYSE by a 2.85-to-1 ratio; on Nasdaq, a 3.06-to-1 ratio favored decliners.

The S&P 500 posted 39 new 52-week highs and no new lows; the Nasdaq Composite recorded 61 new highs and 73 new lows.

Volume on U.S. exchanges was 9.5 billion shares, compared with the 10.5 billion average for the full session over the last 20 trading days.

For a look at all of today’s economic events, check out our economic calendar.

(Additional reporting by Devik Jain and Shreyashi Sanyal in Bengaluru; Editing by Cynthia Osterman)

Investors Pivot to Powell After More Hot U.S. Inflation Data

Stocks appeared to be taking June’s sharp consumer price jump largely in stride, with major indexes edging lower after data showed inflation barreling higher amid supply constraints and a rebound in costs of travel-related services.

Benchmark U.S. Treasuries sold off, with yields rising, after a weak auction for the 30-year note.

With Fed Chair Jerome Powell due to testify before Congress on Wednesday, however, many will be watching for signs that the third straight month of hot inflation is pushing the central bank to alter its stance on rising consumer prices, which it has said are transitory, and may begin unwinding its easy-money policies sooner than expected.

The data were “clearly an upside surprise,” said Michael Brown, senior analyst at Caxton in London. “It will make Powell’s testimony on Capitol Hill tomorrow a much trickier exercise than it would’ve otherwise been given that it will put some additional pressure on the ‘transitory’ narrative.”

Fed monetary support has been a critical for markets as the benchmark S&P 500 index has soared over 95% since March 2020. Any signs of a faster-than-expected unwind of the Fed’s policies in order to curtail inflation, such as a tapering of its bond-buying program, stand to rattle asset prices.

A perceived hawkish shift from the central bank last month led stocks to wobble before indexes pushed to new highs, while the benchmark 10-year Treasury yield has moved lower.

Tuesday’s report, which showed June’s consumer price index rose 0.9% after advancing 0.6% in May, potentially complicates views that the economy is cooling off enough to forestall a faster unwind by the Fed.

Expectations of a slowing rebound have in recent weeks weighed on Treasury yields. They have also accelerated a rotation from shares of economically sensitive companies such as banks and energy firms back into the high growth technology-focused stocks that have led markets higher for most of the last decade.

A BofA Global Research survey of fund managers taken earlier this month found that 70% believed the spike in inflation was transitory, with 26% saying it would be longer lasting.

Indeed, some analysts on Tuesday pointed to details of the CPI rise, including a big boost from used car prices, as supporting the idea that inflation may be transitory.

“The report was a little jarring, but nothing in the report was shocking enough to change the narrative,” said Brian Jacobsen, senior investment strategist at Wells Fargo Asset Management. “It still looks like the inflation pressure is highly concentrated in certain areas tied to the re-opening, like used cars, energy, and hotel prices.”

Powell’s appearances before a House of Representatives committee on Wednesday and Senate panel on Thursday come ahead of the Fed’s next policy meeting on July 27-28. Investors are also focused on the Fed’s economic policy symposium in Jackson Hole, Wyoming in late August for when the central bank could signal a shift.

“The market came around to the idea that the Fed wouldn’t allow inflation to get carried away” after the release of the FOMC policy statement in June, said Jack Janasiewicz, a strategist at Natixis Advisors. “The ‘don’t fight the Fed backdrop’ will be very important here. As long as it continues to provide liquidity it’s tough to get bearish on assets.”

For a look at all of today’s economic events, check out our economic calendar.

(Additional reporting by Saqib Iqbal Ahmed, Karen Brettell and Chuck Mikolajczak in New York; Editing by Chizu Nomiyama)

 

 

 

Earnings to Watch Next Week: Most Big U.S. Banks, PepsiCo, Delta Air Lines and UnitedHealth in Focus

Earnings Calendar For The Week Of July 12

Monday (July 12)

Ticker Company EPS Forecast
FRHC Freedom $0.72

 

Tuesday (July 13)

IN THE SPOTLIGHT: JPMORGAN, PEPSICO, GOLDMAN SACHS

JPMorgan: The New York City-based multinational investment bank and financial services holding company is expected to report its second-quarter earnings of $3.16 per share, which represents year-over-year growth of over 128% from $1.38 per share seen in the same quarter a year ago.

In the last four consecutive quarters, on average, the company has delivered earnings surprise all four times, with of over 32%.

JPM has less excess capital as a % of the market cap relative to other names in the group, which drives a lower benefit from buybacks. We are valuing the group on normalized 2023 EPS. We expect a V-shaped recovery will drive higher reserve release and share buybacks over the next 2 years, with “normalized” post-recession earnings beginning in 2023,” noted Betsy Graseck, equity analyst at Morgan Stanley.

“We see more upside elsewhere in the group, particularly in consumer finance stocks which have been under more pressure. This drives our Underweight rating.”

PEPSICO: The Harrison, New York-based global food and beverage leader is expected to report its second-quarter earnings of $1.53 per share, which represents year-over-year growth of over 15% from $1.32 per share seen in the same quarter a year ago.

The U.S. multinational food, snack, and beverage corporation would post revenue of $17.91 billion. In the last four consecutive quarters, on average, the company which holds approximately a 32% share of the U.S. soft drink industry has delivered an earnings surprise of over 6%.

GOLDMAN SACHS: The New York-based leading global investment bank is expected to report its second-quarter earnings of $9.52 per share, which represents year-over-year growth of over 52% from $6.26 per share seen in the same quarter a year ago.

It is worth noting that in the last two years, the world’s leading investment manager has surpassed market consensus expectations for profit and revenue most of the time. The better-than-expected number would help the stock hit new all-time highs.

“Our 2Q EPS est. increases to $10.05 from $9.53 on positive markets and higher equity investment revs. The equity investment line will likely again be a meaningful rev. swing factor (we model $1.4B vs. $3.1B in 1Q21). Post-DFAST, GS indicated that the dividend will increase to $2.00/qtr. from $1.25/qtr., but did not provide specifics on buybacks. We model 2Q share repurchase of $1.5B (vs. $2.2B cons.) and $2.5B/qtr. (vs.$2.3B/qtr. cons.) for the remainder of this year,” noted Daniel T. Fannon, equity analyst at Jefferies.

TAKE A LOOK AT OUR EARNINGS CALENDAR FOR THE FULL RELEASES FOR THE JULY 13

Ticker Company EPS Forecast
FAST Fastenal $0.41
CAG Conagra Foods $0.52
JPM JPMorgan Chase $3.16
PEP PepsiCo $1.53
GS Goldman Sachs $9.96
FRC First Republic Bank $1.73
HCSG Healthcare Services $0.30
AMX America Movil Sab De Cv Amx $0.32

 

Wednesday (July 14)

IN THE SPOTLIGHT: WELLS FARGO, BANK OF AMERICA, CITIGROUP, DELTA AIR LINES, BLACKROCK

WELLS FARGO: The fourth-largest U.S. lender is expected to report a profit in the second quarter after last year posting its first loss since the global financial crisis of 20028.

Wells Fargo, Bank of America, Citigroup, JPMorgan will tother report profits of $24 billion in the second quarter, up significantly from $6 billion seen last year.

There is no relief for Delta Air Lines, which is expected to post a loss of $1.36 per share on $6.19 billion in revenue.

BLACKROCK: The world’s largest asset manager is expected to report its second-quarter earnings of $9.28 per share, which represents year-on-year growth of over 18% from $7.85 per share seen in the same quarter a year ago.

The New York-based multinational investment management corporation’s revenue would grow over 25% of $4.56 billion. In the last four consecutive quarters, on average, the investment manager has delivered an earnings surprise of over 11%.

The better-than-expected number would help the stock hit new all-time highs. The company will report its earnings result on Wednesday. BlackRock’s shares rose over 24% so far this year. The stock ended 2.83% higher at $901.31 on Friday.

TAKE A LOOK AT OUR EARNINGS CALENDAR FOR THE FULL RELEASES FOR THE JULY 14

Ticker Company EPS Forecast
WFC Wells Fargo $0.95
BAC Bank Of America $0.77
PNC PNC $3.09
C Citigroup $1.99
DAL Delta Air Lines -$1.36
BLK BlackRock $9.28
INFY Infosys $0.17

 

Thursday (July 15)

Ticker Company EPS Forecast
WIT Wipro $0.07
WNS Wns Holdings $0.68
BK Bank Of New York Mellon $1.00
MS Morgan Stanley $1.66
CTAS Cintas $2.31
UNH UnitedHealth $4.43
USB US Bancorp $1.12
TFC Truist Financial Corp $0.98
HOMB Home Bancshares $0.46
AA Alcoa $1.28
VLRS Controladorauelaavcncv $0.80
PGR Progressive $1.07
TSM Taiwan Semiconductor Mfg $0.93
PBCT People’s United Financial $0.34
WAL Western Alliance Bancorporation $1.96

 

Friday (July 16)

Ticker Company EPS Forecast
ERIC Ericsson $0.13
ALV Autoliv $1.40
FHN First Horizon National $0.40
ATLCY Atlas Copco ADR $0.45
STT State Street $1.77
KSU Kansas City Southern $2.18
SCHW Charles Schwab $0.76

 

Concerns Over Slow Economic Recovery Causes JPMorgan and Bank of America Stocks To Slip

The shares of Bank of America and JPMorgan Chase dipped earlier today following concerns amongst investors about the slow pace of economic recovery in the United States. The rapid increase in weekly jobless claims earlier today led to further concerns in the market.

JPM and BAC Shares Are Down

JPMorgan Chase and Bank of America are some of the losers today. During Tuesday’s pre-trading session, the shares of JPMorgan Chase slipped 2.6%, while Bank of America dropped 2.9%. The decline is a result of investors’ concerns about the current state of the economy.

JPM chart. Source: FXEMPIRE

Market participants are concerned that the pace of recovery of the US economy is slow, even though it is higher than what is experienced in Europe. The shares of JPMorgan and Bank of America suffered because banks and other financial institutions are viewed as cyclical stocks, with their performance tied to that of the broader economy.

At the time of writing, JPMorgan’s stock has slightly recovered and is down by less than 1% against the US Dollar. JPM is currently trading at $152.19 per share. The Bank of America stock (BAC) is also recovering and is only down by 1.5%. BAC is trading above the $39 mark.

BAC chart. Source: FXEMPIRE

Investors Concerned By Slow Economic Recovery

The decline in the stock prices of the bank stocks is due to the general concerns around the United States economy. The US Weekly Jobless Claims rose to 373,000 according to the data published today. The increase in this data signifies that the economy is not recovering as expected despite President Biden moving swiftly with vaccine delivery in a bid to completely reopen the economy.

Yesterday, the PMI figures were also weak, indicating that the purchasing power of the citizens is not back to the optimal position.

Bank of America Pulling Back from Multi-Decade Resistance

Bank of America Corp. (BAC) reports Q2 2021 earnings in two weeks, with analysts looking for a profit of $0.76 per-share on $21.85 billion in revenue. If met, earnings-per-share (EPS) will mark a doubling in profit compared to the same quarter last year, which included the first exit from pandemic lockdowns. The stock rose modestly in April after beating Q1 top and bottom line estimates but has gained little ground since that uptick.

 Bond Market Reversal

Commercial bank stocks rolled over in June when the bond market reversed, dropping interest rates across the yield curve by a few basis points. Right now, the decline looks like a countertrend impulse, suggesting that yields will go much higher in coming months. That would be good news for the banking industry because the widening spread between overnight lending rates and the prices paid by borrowers will increase profits.

In addition, Bank of America got good scores on the latest Fed stress test, released on June 28, renewing the current 2.5% stress test buffer while allowing them to increase quarterly dividends by 17%. Unfortunately, the market has responded poorly to the news so far, dropping the stock a few cents. The weak reaction suggests that Bank of America remains overbought after the 15-month 242% advance off March 2020’s pandemic low.

Wall Street consensus has weakened to an ‘Overweight’ rating, based upon 15 ‘Buy’, 2 ‘Overweight’, 6 ‘Hold’, and 1 ‘Underweight’ recommendation. In addition, two analysts recommend that shareholders close positions and move to the sidelines. Price targets currently range from a low of $35 to a Street-high $52 while the stock will open Thursday’s session about $3 below the median $44 target. This mid-range placement suggests that investors believe Bank of America is fairly-valued.

Wall Street and Technical Outlook

Bank of America sold off from 54 to single digits between 2006 and 2009 and has spent the past 12 years retracing that decline. It completed a breakout above the 2018 high at 33.05 in February 2021 and continued to post gains into June’s 13-year high at 42.49. The subsequent decline sliced through the 50-day moving average while a bounce into July is attempting to reinstate support. Meanwhile, a weekly sell cycle predicts mixed action through July.

For a look at all of today’s economic events, check out our economic calendar.

Disclosure: the author held no positions in aforementioned securities at the time of publication.

Today’s Market Wrap Up and a Glimpse Into Tuesday

Stocks came out of the gate strong, with the S&P 500 and Nasdaq both setting new record highs, buoyed by Facebook. The social media giant gained more than 4% on the day and is up in extended hours thanks to a court ruling that went Mark Zuckerberg’s way in an antitrust case filed by the FTC.

Today marked the third consecutive all-time high for the S&P 500.  The Dow Jones Industrial Average didn’t join the party and closed the day slightly in the red. Dow member Boeing pressured the index due to a regulatory setback for its 777X aircraft.

Outside of the stock market, cryptocurrencies were in focus after ARK Invest filed with the U.S. SEC for a bitcoin ETF. The bitcoin price has been leading the markets higher all day even before the ETF development. Cathie Wood, who is at the helm of ARK Invest, is also a Tesla bull.

Stocks to Watch

The top three most actively traded companies today were meme stocks.

  • Context Logic topped the list. The stock, which trades under the symbol WISH, gained 2.5% on the day with 175 million shares changing hands vs. the average volume of 46 million.
  • Virgin Galactic, which was last week’s winner, gave back some ground today, falling nearly 2% after its value ballooned by nearly 40% on Friday. The company received regulatory approval for commercial flights to space.
  • AMC Entertainment tacked on 7.5% after enjoying its best weekend for ticket sales since before the pandemic as moviegoers returned to the theaters.

Financials in Focus

  • Morgan Stanley is up 3.4% in after-hours trading after revealing that it would increase its quarterly dividend twofold to USD 0.70 per share as soon as Q3, pending board approval. The investment bank is going for it and also announced a USD 12 billion share buyback program on the heels of the recent stress test.
  • JPMorgan lifted its dividend to USD 1 per share, an 11% increase in the payout.
  • Bank of America is increasing its distribution by 17% to USD 0.21 per share.
  • Goldman Sachs announced a 60% increase to its quarterly dividend to USD 2 per share, up from USD 1.25.

Look Ahead

The markets are also bracing for June’s employment report, which is expected on Friday. In the interim, Richmond Fed President Thomas Barkin will be making comments on Tuesday. The earnings calendar is light.

FED: What’s Going On Behind the Scenes?

Banking on a Comeback

With the U.S. Federal Reserve (FED) releasing its annual bank stress tests on Jun. 24, Vice Chairman for Supervision Randal Quarles said that “the banking system is strongly positioned to support the ongoing recovery.” For context, the FED’s stress tests analyze the health of U.S. banks’ balance sheets and reveal how they would fare if hypothetical economic doomsdays were to occur.

And while Chairman Jerome Powell told Congress on Jun. 22 that the U.S. economy “is still a ways off,” the results of the stress tests are a contradiction. Case in point: the report revealed that since “all 23 large banks tested remained well above their risk-based minimum capital requirements […] the additional restrictions put in place during the COVID event will end .”

Translation? The FED will allow U.S. banks – like JPMorgan , Bank of America and Citigroup – to resume share buybacks and standard dividend payments (roughly $130 billion worth) as of next month.

Please see below:

Source: U.S. FED

On top of that, the FED considers the following a scary situation:

“The severely adverse scenario is characterized by a severe global recession accompanied by a period of heightened stress in CRE and corporate debt markets. The U.S. unemployment rate climbs to a peak of 10-3/4 percent in the third quarter of 2022, a 4 percentage point increase relative to its fourth quarter 2020 level. Real GDP falls 4 percent from the end of the fourth quarter of 2020 to its trough in the third quarter of 2022. The decline in activity is accompanied by a lower headline consumer price index (CPI).”

However, even if this hypothetical malaise occurs, the FED believes that all 23 banks will pass the test with flying colors.

Please see below:

Source: U.S. FED

To explain, the third column from the left depicts the banks’ regulatory capital ratios under the “severely adverse scenario.” Moreover, if you compare the results with the fourth column from the left, you can see that even if an economic meteor strikes, participants’ ratios will still remain above their regulatory minimums. For context, common equity tier 1 capital (CET1) is the most liquid source of banks’ capital, and the CET1 ratio is used to gauge banks’ ability to absorb losses should an economic shock occur.

But why is all of this so important?

Well, if the FED was so worried about the U.S. economy, would it allow financial institutions to frivolously spend their collateral on dividends and share buybacks? Remember, U.S. banks supply credit card loans, mortgages, commercial loans and finance the sectors that were hardest hit by COVID-19 (commercial real estate, hospitality, energy, etc.). Thus, with the FED giving banks the ‘all-clear,’ it’s a sign that the U.S. economy is much stronger than the FED lets on.

In addition, The White House announced on Jun. 24 that a $1.2 trillion infrastructure deal was reached . And calling the milestone “the largest federal investment in public transit in history and the largest federal investment in passenger rail since the creation of Amtrak,” lawmakers want to cook the U.S. economy until it boils. For context, the agreement includes $579 billion of new spending with the rest being diverted from untapped coronavirus-relief funds.

Please see below:

Source: The White House

More importantly, though, with U.S. lawmakers hell-bent on pushing the limits of inflation and economic growth, the ominous impulse remains bullish for the U.S. 10-Year Treasury yield and the USD Index. Regarding the latter, if U.S. GDP growth outperforms the Eurozone, the EUR/USD – which accounts for nearly 58% of the movement of the USD Index – should suffer in the process. Likewise, with the U.S. 10-Year Treasury yield materially undervalued relative to realized inflation and prospective GDP growth , unprecedented spending should put upward pressure on interest rates. Furthermore, the bullish cocktail should force the FED to taper its asset purchases in September .

To explain, while the PMs are allergic to a rising U.S. 10-Year Treasury yield, the latter doesn’t have to move for the metals to suffer. For example, following the FED’s announcement on Jun. 16, the U.S. 2-Year, 3-Year and 5-Year Treasury yields surged. And while the development flattened the U.S. yield curve – meaning that short-term interest rates rose while long-term interest rates stood pat – the PMs still suffered significant drawdowns. Thus, while the U.S. 10-Year Treasury yield remains ripe for an upward re-rating, even if it stays in consolidation mode, short-term interest rate pressures are just as ominous.

Will We See Another Inflation Surprise?

I wrote on Jun. 22:

The FED increased its year-over-year (YoY) headline PCE Index forecast from a rise of 2.40% YoY to a rise of 3.40% YoY on Jun. 16. However, with the Commodity Producer Price Index (PPI) surging by 18.98% YoY – the highest YoY percentage increase since 1974 – the wind still remains at inflation’s back. Moreover, with all signs pointing to a YoY print of roughly 4% to 4.50% on Jun. 25, the “transitory” narrative could suffer another blow on Friday.

As further evidence, the Kansas City FED released its Manufacturing Survey on Jun. 24. And with the composite index rising from 26 in May to 27 in June, Chad Wilkerson, vice president and economist at the KC FED, had this to say about the current state of affairs:

“Regional factory activity rose again in June and expectations for future activity were the highest in survey history . While the majority of firms continue to face increasing materials prices and labor shortages, many firms have also increased selling prices and capital expenditures for 2021.”

To that point, while the KC FED’s prices paid and prices received indexes declined slightly from their all-time highs, both gauges remain above their prior historical peaks.

Please see below:

To explain, the green line above tracks the KC FED’s prices paid index, while the red line above tracks the KC FED’s prices received index. If you analyze the right side of the chart, you can see that both remain extremely elevated.

On top of that, survey respondents provided the following anecdotal evidence:

Source: KC FED

Also supportive of future economic growth, U.S. manufacturers spent $36.218 billion on machinery in May (the data was released on Jun. 24) – only a slight decrease from the all-time high of $36.364 billion set in April. And with machinery representative of long-lived assets that have high breakeven costs, the recent splurge signals that manufacturers remain optimistic about the recovery.

Please see below:

To explain, the green line above tracks manufacturers’ machinery orders, while the red line above tracks the YoY percentage change in the Private Employment Cost Index (ECI). If you analyze the relationship, you can see that when manufacturers invest in long-term equipment, wage inflation often follows. As a result, if the two lines continue their ascent, it will only increase the odds that the FED tapers in September. Forecasting more hawkish, not more dovish FED seems to be appropriate at this time.

Knock Knock? It’s China, We Want More Money

On top of that, with the U.S. goods trade balance (exports minus imports) revised to -$88.11 billion on Jun. 24, foreign production is required to stock U.S. shelves. And with the Shanghai Containerized Freight Index (the cost to ship from China) unrelenting in its parabolic rise, it’s another indicator that inflationary pressures are unlikely to abate anytime soon.

Finally, with the FED selling another $813 billion worth of reverse repurchase agreements on Jun. 24 (~$53 million below the all-time high set on Jun. 23), the liquidity drain remains on schedule.

Please see below:

Source: NY FED

To explain the significance, I wrote previously:

A reverse repurchase agreement (repo) occurs when an institution offloads cash to the FED in exchange for a Treasury security (on an overnight or short-term basis). And with U.S. financial institutions currently flooded with excess liquidity, they’re shipping cash to the FED at an alarming rate.

More importantly, though, after the $400 billion level was breached in December 2015, the FED’s rate-hike cycle began. On top of that, the liquidity drain is at extreme odds with the FED’s QE program. For example, the FED aims to purchase a combined $120 billion worth of Treasuries and mortgage-backed securities per month. However, with daily reverse repurchase agreements averaging $520 billion since May 21, the FED has essentially negated 4.33 months’ worth of QE in the last month alone.

In conclusion, while the PMs should recover a meaningful chunk of last week’s downswing, their medium-term outlook isn’t so sanguine. With FED hawks and doves splintered down the middle, the fundamentals are firmly tilted in the former’s favor. And with inflation and U.S. GDP growth both accelerating concurrently, unemployment is the only card left for the doves to play. However, with enhanced unemployment benefits expiring in early July for roughly 30% of claimants, U.S. nonfarm payrolls should show strength in August and September. Thus, with the FED’s taper talk likely to grow louder over the next few months, the PMs may not like what they will hear.

Thank you for reading our free analysis today. Please note that the above is just a small fraction of today’s all-encompassing Gold & Silver Trading Alert. The latter includes multiple premium details such as the targets for gold and mining stocks that could be reached in the next few weeks. If you’d like to read those premium details, we have good news for you. As soon as you sign up for our free gold newsletter, you’ll get a free 7-day no-obligation trial access to our premium Gold & Silver Trading Alerts. It’s really free – sign up today.

For a look at all of today’s economic events, check out our economic calendar.

Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Sunshine Profits: Effective Investment through Diligence & Care

* * * * *

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses are based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are deemed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

 

How Will EU Ban on 10 Banks From Bond Sales Impact Markets and Banks?

Here’s what the move means for EU debt sales, bond markets and the affected banks:

WHICH BANKS ARE AFFECTED?

Banks from all corners of the world are affected: U.S. lenders JPMorgan Chase & Co., Citigroup Inc. and Bank of America Corp. as well as British peers Barclays Plc and NatWest Group Plc are on the list.

In continental Europe, Deutsche Bank AG, Natixis SA and Credit Agricole SA and UniCredit SpA are affected. Plus Japan’s Nomura Holdings Inc.. All banks declined to comment.

All on the list of 39 primary dealers responsible for managing debt sales — syndicated and auctioned — for the bloc and managing its debt trading in the secondary market.

Many are Europe’s go-to banks in the public sector bond market; seven are among the top 10 fee earners from syndicated debt sales in this market since 2020, according to Dealogic.

WHAT DID THEY DO?

The ban relates to lenders found being part of three cartels in the past three years. One saw a number of banks fined over tinkering in FX spot markets between 2007-2013. Another one found a number of banks colluded on trading strategies and pricing between 2010-2015 on public sector bonds – debt issued by government-linked institutions. A third one related to a cartel of traders at various banks in the primary and secondary market for European government bonds.

HOW BIG WILL FEE LOSSES BE?

Sitting out from syndications, where investment banks are hired by an issuer to sell debt directly on to end investors, means losing out on lucrative fees. Banks netted 20 million euros – 0.1% of the 20 billion euros – in fees from Tuesday’s debut bond, according to Reuters calculations.

Fees vary with debt maturities; the longer the bond, the higher the fees.

An average of its fees across all maturities for the remaining 60 billion euros of this year’s long-term debt issuance would translate into a pool of another 66 million euros if all that debt were to be syndicated, Reuters calculations showed. Considering it will be divided among all banks participating, that’s a relatively small amount compared to the $224 million top earner JPMorgan alone reaped from syndicated European public sector debt sales since the start of 2020, according to Dealogic.

The EU also pays smaller fees for its recovery fund debt than European sovereigns. However, it currently issues all its debt through syndications and will rely on them much more heavily than sovereigns even after auctions start in September, meaning it is a fee source banks won’t want to miss out on.

Exclusion also means smaller lenders could see their fee share increase. Graphic: EU syndication fees: https://fingfx.thomsonreuters.com/gfx/mkt/azgvooddjvd/4Xyrm-eu-syndication-fees-for-recovery-fund-bonds.png

HOW LONG WILL THE BAN LAST?

No timeline has been given. EU Budget Commissioner Johannes Hahn said the commission would work through information provided by banks on how they addressed the issues “as fast as possible”.

Sources told Reuters some banks already submitted information, with the remaining ones expected to follow soon. This could mean some of the banned banks could get the green light to rejoin bond sales, the sources said.

A senior debt banker at a primary dealer not banned said he expects at least a few of the banks to be re-admitted by September, when EU auctions begin.

WILL IT HIT LIQUIDITY?

ECB bond buying has zapped some liquidity in the bloc’s fixed income markets. Liquidity matters to investors, making it easier and cheaper to transact.

Syndication fees are a key factor that motivate banks to participate in auctions that are much less lucrative but crucial to maintain liquidity.

European governments have lost primary dealers in recent years as banks have judged the business to be less profitable.

And having less major banks left to underwrite its syndications could also pose risks for the EU.

(Reporting by Yoruk Bahceli, Abhinav Ramnarayan, Dhara Ranasinghe and Iain Withers in London, John O’Donnell in Frankfurt and Foo Yun Chee in Brussels; writing by Karin Strohecker; Editing by Chizu Nomiyama)

 

Why Citigroup Stock Is Down By 4% Today

Citigroup Stock Declines As Company Warns That Trading Revenue Would Fall By 30%

Shares of Citigroup gained additional downside momentum and continued their pullback after the company warned investors that its trading revenue would likely decline by about 30% compared to previous year’s levels.

Currently, analysts expect that Citigroup will report earnings of $9.06 per share in 2021. The company’s earnings are projected to decline to $8.25 per share in 2022, so the stock is trading at less than 9 forward P/E which is cheaper compared to peers like Bank of America or JP Morgan.

Citigroup’s shares are up by about 15% this year despite the recent pullback as traders bet that higher interest rates would provide support to financial companies.

The stock suffered a sell-off in June as Treasury yields moved lower, but the situation may change quickly after today’s Fed Interest Rate Decision.

What’s Next For Citigroup Stock?

The near term dynamics of Citigroup stock and shares of other financial companies will depend on Fed’s comments today. If Fed reiterates its dovish message, Treasury yields may move lower, which will be bearish for financial stocks.

In case Fed hints that it is worried about inflation, markets will start to price in the risks of higher interest rates, which will provide support to financial stocks.

It should be noted that Citigroup remains attractively valued compared to many stocks in the current market environment. However, analyst estimates call for lower earnings in 2022, which may serve as an obstacle on the stock’s way up unless there are other positive catalysts.

In this light, the results of today’s Fed’s meeting will likely serve as the main catalyst for the stock until the company provides its second-quarter results on July 14. In fact, dynamics of Treasury yields and Fed’s view of future interest rates will be more important for Citigroup stock compared to the company’s own financial results.

For a look at all of today’s economic events, check out our economic calendar.

Financials Look Ripe For A Reversal

The financials and banking stocks have been some of the best performing of the reflation trade since the second half of 2020. Banks in particular have benefitted handsomely from the rise in yields and steepening of the yield curve. Since last October, the KBE banks ETF is up roughly 100%, rewarding investors who saw fit to take advantage of the immense value on offer at the time. However, there are a number of signs suggesting now may be a prudent opportunity for investors to begin to take profits and redeploy capital elsewhere.

Firstly, from a valuation perspective, the group can no longer be considered cheap on a relative or absolute basis. Of the “big four” banks, JP Morgan Chase and Bank of America are trading at their highest valuations in a decade, as measured by price to book value.

On the whole, we know banks like to make their profits by lending long-term and borrowing short-term. With long-term yields looking to have stalled for the time being, or perhaps even rolling over, the yield curve did not confirm the recent highs in the sector. It looks as though banks may have some catching up to do on the downside.

As banks and financials have largely proven to be a de-facto short-bonds trade of late, the bond market is sending a similar message as the yield-curve.

For the banking sector to continue its outperformance, it needs the tailwind that rising yields provide. With the US 30-year yield recently breaking its uptrend to the downside, it is looking as though this tailwind may be turning into a headwind for the time being. A move down to the 200-day moving average would put the 30-year yield at around 1.9%.

Additionally, there is strong overhead resistance for yields around their current levels. This breakdown coincides with the 30-years recent rejection of said resistance.

Couple this with the fact that small speculators (i.e. the “dumb money”) in the 30-year treasury futures market remain nearly as short as they have ever been, all the while commercial hedgers (i.e. the “smart money”) remain heavily net-long. Such positioning in the past has usually preceded favourable performance for bonds, and thus seen yields fall.

What’s more, we are now entering a seasonally favourable period for bonds and conversely an unfavorable period for yields. This adds to the bearish headwinds for financials.

Turning to the technicals of the financials sector itself, a number of indicators are signaling exhaustion. We are seeing DeMark setup and countdown 9 and 13’s trigger on the daily, weekly and monthly charts. When such exhaustion signals begin to appear on multiple timeframes simultaneously, it is generally a fairly reliable indication a pullback, or at the very least a period of consolidation, is imminent. The 9-13-9 is considered one of the most reliable of the DeMark sequential indicators.

Focusing on the daily chart of the financials sector ETF, we have just seen a breakdown of its ascending wedge pattern. This coincides with bearish divergences in momentum (RSI) and money flow, in conjunction with the aforementioned daily DeMark 9-13-19 sequential sell signals.

A rally to test the underside of the broken trendline could be an attractive point for those looking to take profits, or for those who are so inclined to trade from the short-side. Additionally, seasonality of the financials sector is also signaling that it may be time to take a bearish, or less bullish, stance towards financial stocks.

In summary, the risk-reward setup for banks and financials in the short-term does not appear to be overly favourable, nor do these companies offer the kind value they provided last year. Depending on your intermediate to long-term outlook for the direction of interest rates and whether your are in the inflationary or deflationary camps, a potential pullback may provide an attractive buying opportunity for the inflationist. For the deflationists or for those who believe rates may be peaking, this may be a good time to take profits and redeploy capital in alternative opportunities set to benefit from falling rates.

For a look at all of today’s economic events, check out our economic calendar.

JPMorgan Chase Could Hit New Highs After Earnings

Dow component JPMorgan Chase and Co. (JPM) kicks off first quarter earnings season for the banking sector on Wednesday, followed by Citigroup Inc. (C) and Bank of America Corp. (BAC) on Thursday. The western hemisphere’s largest bank is expected to post a profit of $2.94 per-share on $29.96 billion in Q1 2021 revenue. If met, earnings-per-share (EPS) will mark a dramatic 377% profit increase compared to the same quarter in 2020.

Banks Lift into Market Leadership

Many U.S. banks have broken out above 2018 resistance in reaction to rising interest rates that should bolster industry profits for several years at a minimum. Historically speaking, rising rates are bullish for banks in the early phases of an economic boom but that tailwind dissipates as soon as rates get too high to support growth. That could happen before the next presidential election, given the current rate trajectory and trillions of printed dollars being handed out to U.S. citizens.

CEO Jamie Dimon sounded the alarm in a shareholder letter last week, warning “In an inflationary case, fiscal and monetary policy may very well be at odds. Also in this case, the cost of interest on U.S. debt could go up fairly dramatically making things a little worse. Rapidly raising rates to offset an overheating economy is a typical cause of a recession. One other negative: In this case, we would be going into a recession with an already very high U.S. deficit.”

Wall Street and Technical Outlook

Wall Street consensus has dropped to an ‘Overweight’ rating in response to Morgan’s 23% year-to-date return, based upon 16 ‘Buy’, 2 ‘Overweight’, 6 ‘Hold’, 1 ‘Underweight’, and 2 ‘Sell’ recommendations. Price targets currently range from a low of $95 to a Street-high $187 while the stock ended Friday’s session about $9 below the median $165 target. There’s plenty of room for upside in this configuration, especially if Q1 earnings results exceed expectations.

The stock broke out above the 2000 high in the mid-60s in 2016 and entered a powerful uptrend that stalled above 140 at the end of 2019. It plummeted to a three-year low during the pandemic decline and turned higher in a two-legged recovery that finally reached the prior high in January 2021. Morgan then carved the handle in a cup and handle breakout pattern and took off in a rally that could easily top 200 by the fourth quarter.

For a look at all of today’s economic events, check out our economic calendar.

Disclosure: the author held no positions in aforementioned securities at the time of publication. 

Earnings to Watch Next Week: JPMorgan, Goldman, PepsiCo, BofA, Citigroup and Delta Airlines in Focus

Earnings Calendar For The Week Of April 12

Monday (April 12)

Ticker Company EPS Forecast
HDS HD Supply Holdings $0.39

Tuesday (April 13)

Ticker Company EPS Forecast
FAST Fastenal $0.37
HCSG Healthcare Services $0.28

Wednesday (April 14)

IN THE SPOTLIGHT: JPMORGAN CHASE, GOLDMAN SACHS

JPMORGAN CHASE: The leading global financial services firm with assets over $2 trillion is expected to report its first-quarter earnings of $2.06 per share, which represents year-over-year growth of over 290% from $0.78 per share seen in the same quarter a year ago. In the last four consecutive quarters, on average, the company has delivered an earnings surprise of over 6%.

The New York City-based investment bank would post revenue growth of about 6% to around $29.8 billion.

“We expect JPMorgan to likely beat the consensus estimates for revenues and earnings. The bank has outperformed the consensus estimates in each of the last three quarters, primarily driven by a jump in the Corporate & Investment Banking segment led by higher sales & trading and investment banking revenues. However, the above growth was partially offset by some weakness in the Consumer & Community Banking segment due to the lower interest rates environment. We expect the sales & trading and investment banking revenues to drive the first-quarter FY2021 results as well,” noted analysts at TREFIS.

“Further, recovery in bond yields over the recent months is likely to benefit core-banking revenues. Additionally, JPM released $2.9 billion from its loan-loss-reserve in the fourth quarter, suggesting some improvement in the perceived loan default risk. We expect the same momentum to continue in the first quarter. Our forecast indicates that JPMorgan’s valuation is around $143 per share, which is 7% lower than the current market price of around $154.”

GOLDMAN SACHS: The leading global investment bank is expected to report its first-quarter earnings of $10.10 per share, which represents year-over-year growth of about 225% from $3.11 per share seen in the same quarter a year ago. In the last four consecutive quarters, on average, the company has delivered an earnings surprise of nearly 50%.

The New York City-based bank would post revenue growth of over 31% to around $11.5 billion.

“We expect Goldman Sachs to outperform the consensus estimates for revenues and earnings. The bank has reported better than expected results in each of the last three quarters, mainly due to its strength in sales & trading and the investment banking space,” noted equity analysts at TREFIS.

“Despite the economic slowdown and the COVID-19 crisis, the company reported strong revenue growth in 2020 driven by a 43% y-o-y jump in global markets division (sales & trading) and a 24% rise in the investment banking unit. We expect the same trend to drive the first-quarter FY2021 results as well. Our forecast indicates that Goldman Sachs’ valuation is around $366 per share, which is 12% more than the current market price of around $327.

TAKE A LOOK AT OUR EARNINGS CALENDAR FOR THE FULL RELEASES FOR THE APRIL 14

Ticker Company EPS Forecast
TSCO Tesco £8.15
INFY Infosys $0.16
JPM JPMorgan Chase $3.06
GS Goldman Sachs $10.12
BBBY Bed Bath & Beyond Inc. $0.31
FRC First Republic Bank $1.54
SJR Shaw Communications USA $0.26
WFC Wells Fargo $0.69
ACI AltaGas Canada $0.51

 Thursday (April 15)

IN THE SPOTLIGHT: PEPSICO, BANK OF AMERICA, CITIGROUP, BLACKROCK, DELTA AIR LINES

PEPSICO: The company which holds approximately a 32% share of the U.S. soft drink industry is expected to report its first-quarter earnings of $1.12 per share, which represents year-over-year growth of about 4% from $1.07 per share seen in the same quarter a year ago. In the last four consecutive quarters, on average, the company has delivered an earnings surprise of nearly 6%.

The U.S. multinational food, snack, and beverage corporation would post revenue growth of over 5% to about $14.6 billion.

“Based on the 2020 performance and evolving business conditions, the company provided guidance for 2021. It expects organic revenue growth in the mid-single digits, with core constant currency EPS growth in high-single digits. It expects a core effective tax rate of 21%. Additionally, the company expects currency tailwinds to aid its revenues and core EPS by 1 percentage point in 2021, based on the current rates,” noted analysts at ZACKS Research.

“Further, it remains committed to rewarding its shareholders through dividends and share buybacks. It anticipates total cash returns to shareholders of $5.9 million, including $5.8 million of cash dividends and $100 million of share repurchases. The company recently completed its share-repurchase authorization and expects no more share repurchases through the rest of 2021.”

BANK OF AMERICA: The Charlotte, North Carolina-based investment bank is expected to report its first-quarter earnings of $0.66 per share, which represents year-over-year growth of over 60% from $0.40 per share seen in the same quarter a year ago. In the last four consecutive quarters, on average, the company has delivered an earnings surprise of over 9%.

However, the United States’ second-largest bank would see a revenue decline of more than 4% to around $21.7 billion.

CITIGROUP: The New York City-based investment bank is expected to report its first-quarter earnings of $2.52 per share, which represents year-over-year growth of 140% from $1.05 per share seen in the same quarter a year ago. But Citigroup’s revenue would decline about 12% to around $18.3 billion.

BLACKROCK: The world’s largest asset manager with $8.67 trillion in assets under management is expected to report its first-quarter earnings of $7.87 per share, which represents year-over-year growth of over 19% from $6.60 per share seen in the same quarter a year ago. The New York City-based bank would post revenue growth of about 16% to around $4.3 billion.

DELTA AIR LINES: The Airline company which provides scheduled air transportation for passengers and cargo throughout the United States and across the world is expected to report a loss for the fifth consecutive time of $2.84 in the first quarter of 2021 as the airlines continue to be negatively impacted by the ongoing COVID-19 pandemic and travel restrictions. That would represent a year-over-year decline of over 450% from -$0.51 per share seen in the same quarter a year ago.

The Atlanta-based airline’s revenue would decline more than 50% to around $3.9 billion.

TAKE A LOOK AT OUR EARNINGS CALENDAR FOR THE FULL RELEASES FOR THE APRIL 15

Ticker Company EPS Forecast
CBSH Commerce Bancshares $0.94
PEP PepsiCo $1.12
WIT Wipro $0.07
BAC Bank Of America $0.66
C Citigroup $2.52
UNH UnitedHealth $4.38
HOMB Home Bancshares $0.43
USB US Bancorp $0.95
SCHW Charles Schwab $0.79
TFC Truist Financial Corp $0.93
BLK BlackRock $7.87
JBHT J B Hunt Transport Services $1.22
AA Alcoa $0.41
PPG PPG Industries $1.57
WAL Western Alliance Bancorporation $1.47
TSM Taiwan Semiconductor Mfg $0.93
DAL Delta Air Lines -$2.84
WAFD Washington Federal $0.48

Friday (April 16)

Ticker Company EPS Forecast
CFG Citizens Financial $0.96
BK Bank Of New York Mellon $0.87
PNC PNC $2.70
ALLY Ally Financial $1.13
STT State Street $1.35
MS Morgan Stanley $1.72
KSU Kansas City Southern $1.97

 

Bank of America Firing on All Cylinders Ahead of Earnings

Bank of America Corp. (BAC) is testing March’s 13-year high near 40, thanks to the relentless rise in interest rates, and is well-positioned for additional gains following next week’s Q1 2021 earnings release. Investors have taken note, lifting accumulation readings to the highest highs of the century, confirming renewed optimism that could finally signal a successful assault on 2006’s all-time high in the mid-50s.

Infrastructure Investment Paying Off

The Federal Reserve added to positive sentiment in March, announcing that all restrictions on bank dividends and share repurchases will end for most firms after June 30. The central bank allowed limited dividends and buybacks in the first quarter as part of the recovery from 2020’s pandemic-driven system shock. Banks have built a sizable cash hoard in the improving economic conditions and could deploy that capital aggressively when the last chains come off.

CEO Brain Moynihan outlined growing tailwinds in a recent interview, noting “The key is we’ve been able to invest $3.5 billion a year in technology. We’ve been able to open up branches in many new cities. We’ve been able to raise minimum wages, while we’ve kept expenses down. Now that’s the magic in a franchise, so when rates rise, which they will at some point—and when they did in ’16 and ’17—the earnings rise sharply, because we have no more expenses to deploy and all the revenue that comes in from the deposit base.”

Wall Street and Technical Outlook

Wall Street consensus stands at an ‘Overweight’ rating based upon 15 ‘Buy’, 3 ‘Overweight’, and 9 ‘Hold’ recommendations. One analyst now recommends that shareholders close positions and move to the sidelines. Price targets currently range from a low of $30 to a Street-high $45 while the stock closed Friday’s session less than $2 above the median $38 target. Look for ratings and targets to go higher if Bank of America posts strong first quarter results.

The stock fell to a 26-year low in 2009 and turned higher into the new decade, stalling in the upper teens in 2010. It finally cleared that resistance level after the 2016 presidential election, stalling at the .618 Fibonacci retracement of the 2006 to 2009 decline in October 2019. The March 2020 selloff printed the third higher low since 2009, yielding a breakout that’s now targeting the .786 retracement in the low to mid-40s.

For a look at all of today’s economic events, check out our economic calendar.

Disclosure: the author held no positions in aforementioned securities at the time of publication. 

Countdown to the Fed: What the Analysts Say

Federal Reserve officials are due to issue new economic projections on Wednesday, with an upgrade to GDP growth. Markets predict the Fed may be forced to act sooner than expected in raising rates.

Benchmark 10-year Treasury yields have jumped from 0.953% at the beginning of the year to 1.67% on Wednesday, in the midst of the two-day policy meeting that began on Tuesday. The rise in yields in recent weeks came on optimism about the economic recovery and as the United States readied new fiscal stimulus.

However, a rapid rise in yields can ripple through to other assets, affecting everything from tech and financial stocks to the housing market.

Investors hoping for action from the Fed to cap rising yields on longer-dated Treasuries may be disappointed. While Powell has said he is watching recent Treasury market volatility, he brushed off concerns that the move up in yields might spell trouble for the Fed.

Here are what analysts are saying as the Fed meets:

MIZUHO SECURITIES USA

“There is a risk that the markets will again be disappointed by the post-meeting policy statement,” wrote Steven Ricchiuto, U.S. chief economist at Mizuho Securities USA LLC.

“The Fed’s new operating procedure of targeting maximum employment to finally achieve its 2% average inflation target is designed to see inflation expectations and long-term rates rise. This means policymakers are supportive of recent market developments, i.e. rising long-term rates,” he wrote.

RABOBANK

“The risks are… that long yields react further to all this “running hot,” wrote Michael Every, senior macro strategist, Rabobank. Even “a moderate move higher in yields could be painful – and not just to bonds,” Every wrote.

ING

“Bond investors will be wary of perceptions that the Fed could potentially allow the economy to run too hot for too long,” wrote https://think.ing.com/articles/us-what-to-watch-at-the-march-fed-meeting James Knightley, Padhraic Garvey and Chris Turner, at ING, noting that inflation is “set to accelerate to well above 3%.

HSBC SECURITIES

“We expect the FOMC’s economic and rate projections will be in line with the bond market’s expectations,” wrote Lawrence Dyer, head of U.S. rates strategy and Shrey Singhal, fixed income strategist. “And, we do not expect the FOMC statement or press conference to provide pushback to the recent increase in yields. Thus, there should be a moderate market reaction to the announcement and press conference.”

STANDARD CHARTERED BANK

“We think the FOMC will have a hard time expressing concern about asset markets,” wrote Steve Englander and John Davies at Standard Chartered, while adding that if the Fed’s policy-setting committee and Powell do not “push back against current yield levels, investors are likely to take yields higher as better data arrives.”

NATWEST MARKETS

“Broader financial conditions remain easy, and luckily for (Powell) the U.S. rates market just got through a week of long supply relatively unscathed, at least until Friday, and Friday’s move did not negatively impact risk,” wrote John Briggsglobal head of strategy, NatWest Markets.

“What I do expect is for Powell to push back against the recent rise in the front end, dot move or not, which has pushed market pricing for the first hike to December 2022, from September 2023 at the beginning of the year.”

BANK OF AMERICA

“The Fed likely hopes market pricing is right, since it implies a faster recovery and more rapid attainment of its inflation and employment goals,” wrote Michelle Meyer, Mark Cabana, Ben Randol, Meghan Swiber and Stephen Juneau at Bank of America.

“Powell is likely to reiterate that higher rates are consistent with a re-pricing of fundamentals… Limited pushback on rate hike pricing will also likely be a disappointment for those expecting a continued ultra-dovish Fed, supporting higher belly rates.”

Intermediate-dated notes, known as the “belly” of the Treasury curve, are more sensitive to rate increases.

(Reporting by Karen Brettell; Additional reporting and editing by Megan Davies; Editing by Andrea Ricci)

Bank Earnings Off to a Rough Start

Even so, the group has booked major gains since November when positive vaccine data from Pfizer Inc. (PFE) triggered a sustained rotation out of COVID-19 beneficiaries and into 2021 recovery plays. As a result, current selling pressure appears technical in nature, driven by overbought readings.

Bond yields are rising while the yield curve steepens, signaling a more favorable banking environment that should generate higher profit margins. Revenue remains a major obstacle, with most quarterly reports so far posting substantial year-over-year revenue declines as a result of the pandemic. Dow component JPMorgan Chase and Co. (JPM) is the only bank of the big three to grow revenue in the quarter, in line with its longstanding market leadership.

JPMorgan Chase

JPMorgan Chase lifted to an all-time high ahead of last week’s strong earnings report and pulled back in a notable sell-the-news reaction. Two days of profit-taking could mark the start of an intermediate correction that targets unfilled gaps at 120 and 126. The Nov. 9 breakout gap between 105 and 110 remains unfilled as well, but that might not come into play until later in the year. When it does, it should mark a low-risk buying opportunity.

Bank of America

Bank of America Corp. (BAC) lost nearly 1% on Tuesday after beating Q4 2020 profit estimates and falling short on revenue, with a 9.9% year-over-year decline. Credit loss provisions dropped sharply during the quarter, indicating less stress on customer budgets as the world adjusts to the COVID-19 pandemic. The company announced it would buy back up to $2.9 billion in common stock in the first quarter, after getting Federal Reserve approval.

Citigroup

Citigroup Inc. (C) has booked the greatest downside of the three banks after beating Q4 2020 earnings by a wide margin on Friday. However, revenue fell 10.2% year-over-year, triggering a shareholder exodus that’s now relinquished nearly 8%. Unlike Bank of America, Citi credit losses went in the wrong direction during the quarter, rising to 3.73% of total loans, compared to just 1.84% in the same quarter last year.

For a look at all of today’s economic events, check out our economic calendar.

Disclosure: the author held no positions in aforementioned securities at the time of publication.