New York City-based investment bank Citigroup reported better-than-expected earnings for the first quarter, largely driven by improvements in the macroeconomic outlook and lower loan volumes.
Citigroup reported net income for the first quarter 2021 of $7.9 billion, or $3.62 per diluted share, on revenues of $19.3 billion. This compared to net income of $2.5 billion, or $1.06 per diluted share, on revenues of $20.7 billion for the first quarter 2020. That was higher than Wall Street’s consensus estimates of $2.56 per share.
However, the bank’s revenue decreased 7% from the prior-year period. Citigroup’s end-of-period loans were $666 billion as of quarter-end, down 8% from the prior-year period on a reported basis and 10% excluding the impact of foreign exchange translation.
Citigroup shares, which slumped more than 20% in 2020, rebounded over 17% so far this year.
Citigroup Stock Price Forecast
Fourteen analysts who offered stock ratings for Citigroup in the last three months forecast the average price in 12 months of $83.31 with a high forecast of $117.00 and a low forecast of $66.00.
The average price target represents a 14.31% increase from the last price of $72.88. Of those 14 analysts, nine rated “Buy”, five rated “Hold” while none rated “Sell”, according to Tipranks.
Morgan Stanley gave the base target price of $89 with a high of $130 under a bull scenario and $50 under the worst-case scenario. The firm gave an “Overweight” rating on the investment bank’s stock.
Several other analysts have also updated their stock outlook. Barclays raised the price target to $84 from $77. Piper Sandler lifted the target price to $93 from $89. Oppenheimer increased the price target to $117 from $112. UBS upped the price target to $92 from $89. Credit Suisse raised the price target to $83 from $78.
“Citi is trading at just 0.8x NTM BVPS implying through the cycle ROE of just 8%, well below our 9% estimate for 2023. We believe the stock is cheap even if expenses related to the Fed/OCC consent order remain elevated. We have modeled in expenses rising to $45B / $44B for 2021 / 2022 well above $42B in 2019,” noted Betsy Graseck, equity analyst at Morgan Stanley.
“Citi also has #1 share in Transaction Banking, a business we estimate delivers a ~35% ROTCE for Citi. We believe Citi can add $17 a share in value by disclosing full quarterly details on this business. We bake half in $8, as Citi discloses half of what we would like to see. Citi should get more credit for its global diversification and it’s more resilient wholesale business.”
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.
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.”
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.
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 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 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.
Traders Take Some Profits Off The Table At The Start Of The Earnings Season
S&P 500 futures are moving lower in premarket trading as traders take some profits off the table after Biden’s stimulus plan announcement.
Yesterday, U.S. President-elect Joe Biden unveiled a new stimulus plan worth $1.9 trillion which included $1,400 stimulus checks. Early reports suggested that the plan would be worth $1.5 trillion – $2 trillion so Biden’s proposal was in line with traders’ expectations.
Meanwhile, Fed Chair Jerome Powell stated that it was not the time to talk about changing the pace of monthly bond purchasing, refuting rumors about potential cuts to the current asset purchase program.
While the additional stimulus package and the continued bond purchases should be supportive for stocks in the longer run, traders have decided to take some chips off the table at the beginning of the earnings season.
All three banks easily beat analyst estimates on earnings as they released some of the reserves they built to deal with the consequences of the coronavirus pandemic. Stimulus programs provided support to banks’ customers which allowed banks to enjoy stronger results.
Interestingly, the market is not satisfied with the reports, and banks’ stocks are losing ground in premarket trading. Financials enjoyed a very strong rally in recent months so traders may be using better-than-expected reports as an opportunity to take profits.
Retail Sales Declined By 0.7% In December
The U.S. has just reported that Retail Sales decreased by 0.7% month-over-month in December while analysts believed that they would remain unchanged compared to November levels. On a year-over-year basis, Retail Sales increased by 2.9%.
The slowdown in Retail Sales is due to the negative impact of the second wave of the virus. However, Retail Sales may soon get a boost when additional stimulus checks are delivered.
Later today, the U.S. will provide Industrial Production and Manufacturing Production reports for December. Industrial Production is expected to grow by 0.5% month-over-month while Manufacturing Production is also projected to increase by 0.5%.
The major U.S. stock index futures are edging lower in the pre-market session on Friday as investors digested the details of President-elect Joe Biden’s $1.9 trillion stimulus plan revealed Thursday evening local time.
A quick recap of President-elect Joe Biden’s American Rescue Plan, includes increasing the additional federal unemployment payments to $400 per week and extending them through September, direct payments to many Americans of $1,400, and extending federal moratoriums on evictions and foreclosures through September.
The plan also calls for $350 billion in aid to state and local governments, $70 billion for COVID testing and vaccination programs and raising the federal minimum wage to $15 per hour.
JPMorgan kicks off fourth-quarter earnings season for big banks on Friday at about 12:00 GMT, followed by releases from Wells Fargo and Citigroup.
Earnings expectations for the fourth quarter have been on the rise, thanks to climbing interest rates and expectations for solid trading and investment banking results.
The biggest U.S. banks (with the exception of Wells Fargo) all saw per-share earnings estimates jump by at least 8% in the past month, according to Barclays analysts Jason Goldberg.
Thursday US Stock Market Recap
Wall Street closed lower on Thursday after turning down late in the session as reports emerged about U.S. President-elect Joe Biden’s pandemic aid proposal following earlier data that showed a weakening labor market.
Of the 11 major S&P sectors, only four closed higher with economically-sensitive energy, up 3%, showing the biggest percentage gains as oil prices rose. The biggest percentage decliner on the day was the information technology sector.
The domestically-focused small-cap Russell 2000 Index closed up 2%, while the Dow Jones Transports Index ended up 1% after both sectors, which are seen as big beneficiaries of stimulus, scaled all-time highs during the day.
Helping the transport index was a 2.5% rise in shares of Delta Air Lines after Chief Executive Ed Bastian forecast 2021 to be “the year of recovery” after the coronavirus pandemic prompted its first annual loss in 11 years.
The S&P 1500 Airlines Index closed up 3.4%.
The Philadelphia Semiconductor Index also hit a record high with a big boost from Taiwan Semiconductor Manufacturing Co Ltd. The chip manufacturer’s U.S. shares closed up 5% after it announced its best-even quarterly profit and raised revenue and capital spending estimates.
SYNNEX: California-based business process services company’s earnings to decline to $2.89 per share the fourth quarter, down from $4.26 per share reported the same quarter last year. The leading provider of business-to-business information technology services’ quarterly revenue will fall more than 5% to just over $6 billion from $ 6.58 billion a year ago.
“For the fourth quarter of fiscal 2020, revenues are expected between $6.45 billion and $6.65 billion. Non-GAAP net income is estimated in the range of $190.5 to $203.5 million. Moreover, the company projects non-GAAP earnings between $3.68 and $3.93 per share,” noted analysts at ZACKS Research.
CARNIVAL: The world’s largest cruise ship operator is expected to report a loss for the third consecutive time in the fourth quarter. The Miami, Florida-based company’s revenue will plunge nearly 100% to $142.09 million from $4.78 billion posted in the same period a year ago. Carnival is expected to report a loss of $1.83 per share, worse compared to a profit of 62 cents per share registered in the same quarter last year.
“We think the cruise industry will be one of the slowest sub-sectors to recover from the COVID-19. Cruising needs just not international travel to return, but ports to reopen, authorities to permit cruising, and the return of customer confidence,” said Jamie Rollo, equity analyst at Morgan Stanley.
“We expect cruising to resume in January 2021, and only expect FY19 EBITDA to return in FY24 given historically CCL has lacked pricing power, and EPS to take even longer given dilution of share issues and higher interest expense. We see debt doubling in FY21 vs FY19 due to operating losses and high capex commitments, and leverage looks high at 4-5x even in FY23-24e, so we see risk more equity might need to be raised,” Rollo added.
According to the mean Refinitiv estimate from eleven analysts, Carnival Corp is expected to show a decrease in its fourth-quarter earnings to -186 cents per share. Wall Street expects results to range from a loss of $-2.10 to a loss of $-1.64 per share, Reuters reported.
“Delta is the airline most exposed to corporate travel, which was positive pre-pandemic. Corporate travel remains down 85% and the only corporate traveller flying now appears to be those at small and medium-sized businesses. Delta had hoped for a recovery in business travel in 2H21, but it is becoming increasingly clear that business travel will not be a meaningful contributor to revenue in 2021 as vaccination timelines continue to shift out,” said Helane Becker, equity analyst at Cowen and company.
BLACKROCK: The world’s largest asset manager is expected to report a profit of $8.66 in the fourth quarter, which represents a year-over-year change of more than +3%, with revenues forecast to grow over 7% year-over-year to $4.27 billion.
“We believe BlackRock is best positioned on the asset management barbell given leading iShares ETF platform, multi-asset & alts combined with technology/Aladdin offerings that should drive 10% EPS CAGR (2020-22e) via 5% average long-term organic growth & continued op margin expansion. We see further growth ahead for Alts, iShares, international penetration, and the institutional market in the US,” said Michael Cyprys, equity analyst at Morgan Stanley.
“We expect the premium to widen as BlackRock takes share in the midst of market dislocation and executes on improving organic revenue growth trajectory.”
“Citi is trading at just 0.7x NTM BVPS implying a through the cycle ROE of just 7%, well below our 9% estimate for 2023. While there is uncertainty around how much Citi needs to invest in technology to address the Fed and OCC consent orders around risk management, data governance and controls, we believe the stock is cheap even if expenses remain elevated. We have modelled in expenses rising to $44B for 2021 and 2022 well above $42B in 2019,” noted Betsy Graseck, equity analyst at Morgan Stanley.
“Moreover, Citi is not getting credit for its diversification (only 40% of total loans are consumer and only half of those are credit card). Citi also has a more resilient wholesale business, skewed to FX, EM and cash management.”
WELLS FARGO: The multinational financial services company is expected to report a profit of $0.58 in the fourth quarter, which represents a year-over-year slump of more than 30%, with revenues forecast to decline about 9% year-over-year to $18 billion. Seaport Global Securities also issued estimates for Wells Fargo & Company’s Q2 2021 earnings at $0.60 EPS and FY2022 earnings at $3.10 EPS.
“Net interest income is anticipated to be $40 billion for 2020, lower than the previous guidance due to lower commercial loan balances and higher MBS premium amortization. Management expects fourth-quarter origination volume to be similar to third-quarter levels despite typical seasonal declines and fourth-quarter production margins should remain strong,” noted analysts at ZACKS Research.
“The company expects internal loan portfolio credit ratings, which were also contemplated in the development of allowance, will result in higher risk-weighted assets under the advanced approach and under the standardized approach in the coming quarters, which would reduce CET1 ratio and other RWA-based capital ratios.”
Bank stocks came under heavy selling pressure earlier this year as the coronavirus pandemic upended economic activity, causing banks to significantly beef up their bad debt provisions. However, the group has almost doubled the broader market’s performance over the last month as investors bet that a vaccinated population and ongoing levels of record stimulus spending will spark a strong recovery in 2021.
Below, we look at three large-cap banking stocks that each trade above their 200-day simple moving average (SMA).
JPMorgan Chase & Co.
With a market value upwards of $370 billion and issuing a 3.01% dividend yield, New York-based JPMorgan Chase & Co. (JPM) operates as a financial services company through four segments: consumer & community banking, corporate & investment bank, commercial banking, and asset & wealth management.
The financial giant eased concerns of ongoing loan defaults during its latest quarterly earnings release, disclosing that it had reduced provision for credit costs by $569 million.The bank had added more than $15 billion to loan loss reserves in the first half of 2020. Technical analysis shows price continuing higher after the 50-day SMA crossed above the 200-day SMA, marking the start of a new uptrend. Further bullish momentum may see the stock retest its 52-week high at $141.10.
Citigroup Inc. (C) provides diversified financial services and products in over 100 countries to consumers, corporations, governments, and institutions. Like its competitors, the bank slashed its loan loss provisions in the third quarter, with net credit losses declining to $1.9 billion from $2.2 billion in the previous three-month period. Moreover, the bank’s CEO Michael Corbat told investors that credit costs have stabilized and deposits continue to increase, per CNBC.
The stock has a market capitalization of $119 billion and offers a 3.68% dividend yield. From a technical standpoint, the price trades above both a multi-month downtrend line and the 200-day SMA, which may see the bulls test the top of a previous trading range at $73.
Wells Fargo & Company
Wells Fargo & Company (WFC) serves its customers through three business divisions: community banking, wholesale banking, and wealth- and investment management. Although the 168-year-old bank reported a 19% year-over-year (YoY) decline in Q3 net interest income, it set aside just $769 million for credit losses – down substantially from the $9.5 billion put aside in the second quarter.
The company has a market value of $119.36 billion and pays investors a 1.43% dividend yield. Chart wise, since hitting its 2020 low in late October, the price has gained nearly 40% to now trade back above the 200-day SMA. Ongoing buying could see the stock test major resistance levels at $34 and $43.
Investors also appeared to be unconcerned that the vaccine prompted some side effects in these early stage trials, however Asia markets were slightly more mixed with the Bank of Japan leaving rates unchanged.
The Nikkei225, and Korean markets pushed higher, however Chinese and Hong Kong markets slid back in the wake of President Trump signing the legislation revoking Hong Kong’s special trade status.
Markets here in Europe have taken their cues from the late rally in the US, opening higher as the tug of war between the bulls and the bears continues with respect to the next significant move.
The DAX is once again trading back close to the highs we saw in early June, while the FTSE100 is once again back above the 6,200 level, having been in a fairly broad 6,000/6,400 range for the past four weeks.
Luxury fashion retailer Burberry has had to contend with a number of challenges over the last 12 months, from the disruption of its Hong Kong business as well as the fallout from weaker Chinese demand and the spread of coronavirus. In May the company reported full-year numbers that saw operating profits slide 57% to £189m Revenues were hit hard by the costs of the disruptions in Hong Kong as well as the closure of various stores due to coronavirus pushing their impairments up to £245m.
This morning’s Q1 numbers are slightly better, with Q1 sales declining 45% while Q2 sales are expected to fall by between 15% and 20%. Retail revenue almost halved from £498m to £257m. This is a little disappointing but not altogether surprising, and given recent news of further restrictions in Hong Kong, could be viewed as being on the optimistic side, which probably helps explain why the shares are lower in early trade.
The improvement in Q1 is mainly down to stores in mainland China and Korea re-opening, however given the recent challenges posed by coronavirus, management appear to be looking towards making some savings in the way the business is run by introducing some changes, taking a restructuring charge of £45m.
Some of these changes, as well as some office space rationalisation could mean a reduction in headcount at its London Head Office, delivering annual savings of £55m.
Electrical retailer Dixons Carphone reported its latest full year numbers, which saw revenues come in around 1% above expectations, at £10.17bn, and down 3% on 2019 levels.
The company posted a loss after tax of £163m, largely down to the impact of Covid-19, which impacted the UK and Ireland mobile operations causing revenues to fall 20%. This was primarily down to the closure of stores at the end of March. All other areas of the business saw revenues increase over the period. While losses have reduced, and the outlook set to remain uncertain, the shares have slipped sharply in early trade, however all other areas of the business performed quite well, which suggests that investors might be overreacting to the losses in the mobile division, which Dixons is pulling away from in any case.
Fast fashion retailer ASOS latest update for the four months to the end of June, has seen the shares push back up towards this year’s high on expectations that profits are likely to be at the upper end of forecasts. Group sales saw an increase of 10% to just over £1bn for the period, with the customer base seeing a rise of 16%. Most of the sales growth came in its EU market, with a rise in sales of 22%. Gross margins were lower to the tune of 70bps, a trend that seems likely to continue given the current environment.
In a sign that fashion companies are becoming increasingly nervous about their brand reputation, ASOS also announced that they were axing contracts to suppliers who were found to be in breach health and safety, as well as workers’ rights regulations.
Homeware retailer Dunelm Group was one of the few success stories in UK retail last year, with the company posting strong operating profits and paying a special dividend. We are unlikely to see anything like that this year. The company closed all of its stores on the 24th March, furloughing employees under the governments job retention scheme, at a cost of £14.5m, and has slowly been reopening the business since late April, when it reopened its on line operations. At the time it said it had enough capital to withstand store closures of up to six months.
Fortunately, that hasn’t come to pass, and the company never had to draw on its £175m financing facilities. All of its stores have now re-opened, with one-way systems and strict social distancing guidelines in place. The in-store coffee shops are expected to reopen by the end of July, while the share price has managed to recover most of its losses for this year. This morning’s Q4 update, has seen total sales for the quarter decline by 28.6%. Online sales more than made up for that with a rise of 105.6% year on year, with the month of May seeing a 141% increase.
In terms of the full year numbers, sales were only down 3.9% on the prior year at £1.06bn, with profits before tax expected to be in the range of £105m to £110m, down from £125.9m the previous year, which given the disruption over the last few months is a pretty decent performance.
In terms of the future, costs are expected to increase to the region of £150k per week, however given how badly coronavirus has affected other retailers, Dunelm has ridden out the storm remarkably well.
The pound is holding up well after a weak session yesterday with the latest inflation numbers showing a modest uptick in June to 0.6%, with core prices rising 1.4%, from 1.2% in May.
Crude oil prices are a touch higher this morning ahead of an online meeting of OPEC+ monitoring committee which could decide whether the group is inclined to maintain the production cuts currently in place, which are due to expire at the end of this month.
US markets look set to open higher, building on the momentum seen in the leadup to last nights close, with the focus once again back on the latest bank earnings numbers for Q2.
Having seen JPMorgan, Citigroup and Wells Fargo collectively set aside another $28bn in respect of non-performing loans yesterday, that number is set to increase further when the likes of Bank of America, Goldman Sachs and Bank of New York Mellon report their latest Q2 numbers later today.
In Q1 US banks set aside $25bn in respect of credit provisions, and the key takeaway from yesterday was that while these banks trading divisions were doing well, their retail operations were starting to creak alarmingly. This is why Wells Fargo suffered its worst year since 2008, given that it lacks an investment banking arm, and could well see the bank embark on some significant cost saving measures over the course of the next few months.
The difference between Wells Fargo and JPMorgan’s numbers couldn’t have been starker, with Wall Street trading operations doing well, while Main Street painted a picture of creaking consumer finances.
Dow Jones is expected to open 190 points higher at 26,832
S&P500 is expected to open 15 points higher at 3,212
The Market Ignores New Virus Containment Measures And Continued Deterioration In U.S. – China Relations
S&P 500 futures are mixed in premarket trading despite California’s decision to introduce new virus containment measures and additional deterioration in U.S. – China relations.
Facing a surge in the number of new coronavirus cases, California decided to shut bars and close indoor dining. In addition, the hardest-hit counties will have to close gyms, hair salons and churches.
Yesterday, this decision led to a massive reversal of S&P 500 during the trading session but this sell-off did not get any continuation.
Meanwhile, U.S. – China relations got a fresh blow after U.S. rejected China’s claims in the South China Sea, calling them “unlawful”. At this point, the market continues to ignore risks of a new round of U.S. – China trade war.
Citigroup, JPMorgan and Wells Fargo Open The Earnings Season For Banks
Banks’ earnings are the main reason for market optimism this morning. Citigroup, JPMorgan and Wells Fargo have just provided their second-quarter reports.
JPMorgan reported earnings of $1.38 per share and increased its reserves by $8.81 billion. Analysts expected earnings of $1.23 per share.
Citigroup’s earnings were much better than expected at $0.50 per share compared to analyst consensus of $0.27 per share. Not surprisingly, Citigroup increased its reserves by $5.6 billion.
Wells Fargo reported a loss of $0.66 per share which was worse than the analyst consensus which called for a loss of $0.10 per share. The bank had to increase its reserves by $8.4 billion. In addition, Wells Fargo decided to cut its dividend by as much as 80%.
Citigroup and JPMorgan shares are up in premarket trading while Wells Fargo is under pressure which is not surprising given the massive dividend cut. The huge increase in reserves was expected given the current market situation. In my opinion, it’s a good start for the earnings season as stronger banks easily exceeded analyst expectations.
Inflation Rate Gets Back To The Positive Territory
The U.S. has just provided Inflation Rate and Core Inflation Rate reports for June. Inflation Rate increased by 0.6% month-over month in June compared to a decrease of 0.1% in May. On a year-over-year basis, Inflation Rate was also 0.6%.
Core Inflation Rate grew by 0.2% month-over-month. On a year-over-year basis, Core Inflation Rate increased by 1.2%.
Both Inflation Rate and Core Inflation Rate were a bit higher than expected which shows that customer activity has likely started to rebound in June.
It’s a bumper week for US bank results, with Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase and Wells Fargo all revealing how they fared in Q2. These results are likely to be closely scrutinised for further evidence that US banking chiefs are concerned about setting aside higher provisions in respect of large-scale loan losses, after the $25bn set aside at the end of Q1.
The impact on the US, UK and European banking sectors has been fairly similar in terms of share price performance, with banks a serial drag on all of the major indices. The S&P 500 is now back to slightly negative year-to-date, while the CMC Markets US Banks share basket is down 35%.
CMC bank baskets sector comparison (2020)
One shouldn’t read too much into this similar performance given that US banks have come down from a much higher baseline. But the declines do highlight where the pressures lie when it comes to the weak points in the global economy, as rising unemployment puts upward pressure on possible loan default rates.
This higher baseline for US banks came about in the aftermath of the financial crisis, when US authorities took much more decisive action to shore up their banking sector in the wake of the collapse of Lehman.
The thought process as the crisis was unfolding was that capitalism needed to take its course in allowing both Bear Stearns, as well as Lehman, to collapse in order to make the point that no one institution was too big to fail. It’s certainly a sound premise, and in most cases allowing a failing business to fold wouldn’t have too many long-term consequences.
Unfortunately, due to the complex nature of some the financial instruments designed by bankers and portfolio managers, it was a premise that was destined to fail. Its failure still scars policymakers’ reaction function when they make policy decisions today.
It soon became apparent in the fall of Lehman, that allowing one big player to fail caused widespread panic in the viability of almost every other financial institution. Like pulling one Jenga block out of a tower of financial complexity, it undermined the stability of the entire construct.
Some institutions continue to be too big to fail, as well as being too big to bail out, meaning that global policymakers only have the tools of annual stress tests to ensure that these institutions have the necessary capital buffers to withstand a huge economic shock.
Since those turbulent times when US authorities forced all US banks to clean up their balance sheets, by insisting they took troubled asset relief program (TARP) money, whether they needed to or not, the US banking sector has managed to put aside most of its problems from the financial crisis.
As can be seen from the graph below, the outperformance in US banks has been remarkable. However a lot of these gains were juiced by share buybacks, as well as the tailwind of a normalised monetary policy from the US Federal Reserve from 2016 onwards, and a US economic recovery that peaked at the beginning of 2019.
US banks’ share price performance
It should also be noted that while Bank of America has been by far the largest winner, it was also one of the biggest losers in 2008, due to its disastrous decision to purchase Countrywide. The deal prompted the Bank of America share price to plunge from levels above $50 a share to as low as $3 a share, costing the bank billions in losses, fines and aggravation.
UK and European banks shares in similar plight
UK authorities have also gone some way to improving the resilience of its own banking sector, though unlike the US, we do still have one big UK bank in the hands of the taxpayer, in the form of Royal Bank of Scotland. Others have been left to fend for the scraps in fairly low-margin banking services of mortgages, loans and credit cards.
UK banks’ trading operations were also curtailed sharply in the wake of the financial crisis, in the mistaken belief that it was so-called ‘casino’ investment banking that caused the crisis, rather than the financial ‘jiggery-pokery’ of the packaging and repackaging of CDOs of mortgages and other risky debt.
In Europe, authorities have made even fewer strides in implementing the necessary processes to improve resilience. The end result is that the banking sector in the euro area is sitting on very unstable foundations, with trillions of euros of non-performing loans, and several banks in the region just one large economic shock away from a possible collapse.
The current state of the banking sector
While we’ve seen equity markets remain fairly resilient in the face of the massive disruption caused by the coronavirus pandemic, the same cannot be said for the banking sector, which has seen its share prices sink this year.
Nowhere is that better illustrated than through our banking share baskets over the last 15 months.
Banking sector vs US SPX 500 comparison
Despite their fairly lofty valuations, the share price losses for US banks have seen a much better recovery from the March lows than has been the case for its UK and European counterparts.
This has probably been as a result of recent optimism over the rebound in US economic data, although the recovery also needs to be set into the context of the wider picture that US banks are well above their post-financial-crisis lows, whereas their European and UK counterparts are not.
Another reason for this outperformance on the part of US banks (black line) is they still, just about, operate in a largely positive interest rate environment, and also have large fixed income and trading operations, which are able to supplement the tighter margins of general retail banking. They have also taken more aggressive steps to bolster their balance sheets against significant levels of loan defaults.
In Q1, JPMorgan set aside $8bn in respect of loan loss provisions in its latest numbers, while Wells Fargo set aside $4bn. Bank of America has set aside $3.6bn, while Citigroup has set aside an extra $5bn. Goldman Sachs also had a difficult first quarter, largely down to setting aside $1bn to offset losses on debt and equity investments.
With New York at the epicentre of the early coronavirus outbreak, Bank of New York Mellon’s loan loss provision also saw a big jump, up from $7m a year ago to $169m. Morgan Stanley completed the pain train for US banks, with loan loss provisions of $388m for Q1, bringing the total to around $25bn.
What to look out for as US banks report Q2 figures
As we look ahead to the US banks Q2 earnings numbers, investors will be looking to see whether these key US bellwethers set aside further provisions in the face of the big spikes seen in unemployment, and the rising number of Covid-19 cases across the country.
Another plus point for US banks will be the fees they received for processing the paycheck protection program for US businesses. It’s being estimated that US banks that are part of the scheme have made up to $24bn in fees, despite bearing none of the risk in passing the funds on from the small business administration.
In the aftermath of the lockdowns imposed on the various economies across Europe, the Eurostoxx banking index hit a record low of 48.15, breaking below its previous record low of 72.00 set in 2012 at the height of the eurozone crisis. It’s notable that UK banks have also underperformed, though it shouldn’t be given the Bank of England’s refusal to rule out negative rates, which has helped push down and flatten the yield curve further.
This refusal further suppressed UK gilt yields, pushing both the two-year and five-year yield into negative territory, and eroding the ability of banks to generate a return in their everyday retail operations.
It’s becoming slowly understood that negative rates have the capacity to do enormous damage to not only a bank’s overall probability, but there is also little evidence that they can stimulate demand. If they did, Japan, Switzerland and Europe would be booming, which isn’t the case.
Most likely, the market will focus on the banks’ earnings outlook since the second-quarter is expected to look bad. For example, Citigroup’s earnings are expected to decline from $1.06 per share in the first quarter to just $0.27 per share in the second quarter.
While traders wait for the upcoming earnings reports, S&P 500 futures are gaining ground in the premarket trading session, and the U.S. stock market is set to continue its upside trend.
China Announces Sanctions Against U.S. Senators
In the previous week, the U.S. has sanctioned high-ranked Chinese officials for alleged human rights abuse against Uighur minority in China. China promised to introduce counter-measures but did not provide any details about such measures at that time.
Today, these counter-measures were revealed. China decided to announce sanctions against U.S. Senators Marco Rubio and Ted Cruz. U.S. Representative Chris Smith as well as U.S. Congressional-Executive Commission on China were also put on sanctions list.
This move marks another increase in U.S. – China tensions which have unnerved the market for quite some time. While these sanctions will not have a direct impact on day-to-day business life, they show that both U.S. and China are ready to take new steps in their battle against each other, which is a major risk factor as the world economy tries to recover from the hit dealt by the coronavirus pandemic.
Inflation Is Expected To Return Back Into The Positive Territory
The drug in question has been tipped as a potential treatment for the coronavirus for several months, and the findings from the latest study boosted market sentiment. BioNTech and Pfizer are working on a potential vaccine for Covid-19, and at the back end of last week, BioNTech announced that it is possible that its drug might receive approval from the FDA by December.
The pandemic will continue to dominate the headlines. On Sunday, the WHO said that another record was set for the number of daily cases. For the fourth day in a row, the US registered over 60,000 new cases. Countries like India and Mexico are seeing a rise in the number of new cases too.
Overnight, stock markets in Asia pushed higher despite the deteriorating health situation. This week US earnings season will kick-off and tomorrow big banks such as JPMorgan, Wells Fargo and Citigroup will reveal their numbers.
The latest jobs data from Canada showed that the economy is turning around. The unemployment rate fell from 13.7% in May to 12.3% in June, which was encouraging to see, but it is worth noting that economists were expecting a reading of 12%. The employment change reading showed that 952,900 jobs were added last month, and that comfortably topped the 700,000 consensus estimate. The May update showed that nearly 290,000 jobs were created, so last month’s report was a big improvement.
The finer details of the update showed that 488,100 full-time jobs were added, while 464,800 part-time jobs were created. Average wages fell to 6.8% from 9.96%, and that was likely down to the return of lower-income earners back to the jobs market. Typically, a decrease in earnings would be seen as negative as workers who earn less typically spend less, but in these circumstances, it could be seen as positive as it is a sign that more people are going back to work.
Demand at the factory level in the US continues to be weak as the headline PPI remained at -0.8% in June, while economists were expecting it to rebound to -0.2%. The core reading, which strips out commodity prices, fell to 0.1% from 0.3%. The core report is considered to be a better reflection of underlying demand. PPI is often a front-runner for CPI, because if demand at the factory level is falling, it will probably fall at the consumer level too. The headline CPI rate is currently 0.1%, and in the months ahead it is likely to remain under pressure.
The US dollar index fell on Friday as traders turned their backs on the currency as they were in risk-on mode. In the past few months, the greenback has acted as a flight-to-quality play, and it typically slides when dealers are keen to take on more risk.
Metals performed well last week. Gold hit a level last seen in September 2011, silver hit a 10-month high, and copper reached a level last seen in April 2019. The weaker greenback was a factor in the positive run in the metals market. Copper is often seen as a good proxy for demand, so its rally suggests the traders are banking on a continuation in the rebound of the global economy.
Oil gained ground on Friday as the overall sense of optimism boosted the energy market. The Baker Hughes report showed the number of active oil rigs in the US fell by four to 181, its lowest since 2009. The rig count is falling but it is falling at a slower pace. The number of active gasoline rigs in the US fell by one to 75, matching its lowest level on record. One report over the weekend claimed that Saudi Arabia are keen to raise production and retreat from the record production cuts that were announced in April.
Andrew Bailey, the governor of the Bank of England, will take part in a webinar at 4.30pm (UK time).
Since early May it has been in an uptrend, but it has been trading sideways recently. If it holds above the 1.1168 zone, it could target 1.1495. A break below the 1.1168 area might pave the way for 1.1049, the 200-day moving average, to be targeted.
Since late June it has been in an uptrend, and should the positive move continue, it might target 1.2690, the 200-day moving average. A move through that level should put 1.2813 on the radar. Thursday’s candle has the potential to be a gravestone doji, and a move lower could see it target 1.2436, the 100 day moving average. A drop below 1.2251, might bring 1.2076 into play.
Last Tuesday’s daily candle was a bearish reversal, and if it moves lower it might find support at 0.8881, the 100-day moving average. A retaking of 0.9067 could see it target 0.9239.
The USD/JPY been drifting lower for the last month and support could come into play at 106.00. A rebound might run into resistance at 108.37, the 200-day moving average.
FTSE 100 is expected to open 55 points higher at 6,150
DAX 30 is expected to open 151 points higher at 12,784
CAC 40 is expected to open 55 points higher at 5,025
By David Madden (Market Analyst at CMC Markets UK)
September E-mini S&P 500 Index futures are trading higher shortly before the cash market opening on Tuesday after White House trade advisor Peter Navarro clarified that the U.S.-China trade deal is not over.
Earlier in the session, the benchmark index plunged after White House trade advisor Peter Navarro made comments about U.S.-China trade relations that were misinterpreted. The market turned around after Navarro clarified that the U.S.-China trade deal is not over.
The main trend is up according to the daily swing chart. A trade through 2923.75 will change the main trend to down. A move through 3220.50 will signal a resumption of the uptrend.
The minor trend is down. A trade through 3156.25 will change the minor trend to up. This will also shift momentum to the upside.
The minor range is 3220.50 to 2923.75. Its 50% level or pivot is 3072.00.
The short-term range is 2751.50 to 3220.50. Its 50% level support is 2986.00.
The main retracement zone support is 2926.25 to 2781.00. This zone is controlling the longer-term direction of the index.
Daily Swing Chart Technical Forecast
Based on the early price action, the direction of the September E-mini S&P 500 Index the rest of the session on Tuesday is likely to be determined by trader reaction to 3072.00.
A sustained move over 3072.00 will indicate the presence of buyers. The next upside target is the minor top at 3156.25. Taking out this level could trigger an acceleration into the main top at 3220.50.
A sustained move under 3072.00 will signal the presence of sellers. This could trigger a break into the minor bottom at 3027.25, followed closely by the 50% level at 2986.00.
Longs are likely to get nervous if 2926.25 to 2923.75 fails as support. This could trigger the start of an acceleration to the downside.
Google LLC, an American multinational technology company that specializes in internet-related services and products, is likely to post an advertising revenue drop of 5.3% as the impact of the coronavirus pandemic hits businesses and ad expenditures worldwide, according to eMarketer.
That fall for the world’s largest online advertising company is largely due to their heavy dependence on international tourism and travel advertisement on Google search, which has been affected by the COVID-19 pandemic. If eMarketer’s forecasts were realized, Google will post its first decline since the global financial crisis of 2008.
All industries have been affected by the coronavirus pandemic worldwide, pushing firms to cut their advertising expenditure as travel restrictions worsened demand.
According to eMarketer, Google’s U.S. ad revenue could have grown by nearly 13% without the recent pandemic. The research firm expects that Google’s competitors will also feel the heat. Facebook Inc, an American social media conglomerate based in Menlo Park, California, is forecast to grow its U.S. advertising revenue by about 5%, way less than 2019’s growth of over 25%.
The workers in a petition seen by Reuters expressed disappointment with Google for not joining the “millions who want to defang and defund” police departments. Protests have erupted in the U.S. and around the world over the killing of George Floyd, who died after a police officer knelt on his neck for minutes in Minneapolis last month.
“We should not be in the business of profiting from racist policing,” the Google petition has seen by Reuters noted.
Google stock outlook
Thirty-four analysts forecast the average price in 12 months at $1,493.03 with a high of $1,800.00 and a low of $1,237.00. The average price target represents a 2.92% increase from the last price of $1,450.66, according to Tipranks.
It is good to buy at the current level as all major technical indicators, including 20-day Moving Average and 100-200-day MACD Oscillator signals a buying opportunity. BofA global research raises price objective to $1,610 from $1,420 and Citigroup raises price target to $1600 from $1400.
Citigroup analysts in its May research report noted that “We now model 5% year-on-year growth in 2020, with full-year revenue reaching $169.6 billion, and we expect 20% year-on-year rebound in 2021, with full-year revenue reaching $203.4 billion.”
The bank further cut Alphabet Inc’s revenue estimates for the Q2 2020 to reflect the impact of the health crisis, which has hurt advertising revenues.