Wall Street Banks Set to Profit Again When Fed Withdraws Pandemic Stimulus

With the central bank nearing the time when it will start winding down its asset purchases, banks are set to profit again as increased volatility encourages clients to buy and sell more stocks and bonds, analysts, investors and executives say.

The Fed has been buying up government-backed bonds since March 2020, adding $4 trillion to its balance sheet, as part of an emergency response to the COVID-19 pandemic.

The strategy was designed to stabilize financial markets and ensure companies and other borrowers had sufficient access to capital. It succeeded but also resulted in unprecedented levels of liquidity, helping equity and bond traders enjoy their most profitable period since the 2007-09 financial crisis.

The top five Wall Street investment banks – JP Morgan Chase & Co, Goldman Sachs, Bank of America, Morgan Stanley and Citigroup – made an additional $51 billion in trading revenues last year and in the first three quarters of 2021, compared with the comparative quarters in the year prior to COVID, according to company earnings statements.

The trading bonanza, along with a boom in global deal-making, has helped bank stocks outperform the broader market. The KBW Bank index has risen by 40% in the year-to-date compared with a 19% advance in the S&P 500.

Now, banks with large trading businesses are expected to profit a second time as the Fed starts to withdraw the stimulus, prompting investors to rejig their portfolios again.

“As investors look to position based on that volatility, that creates an opportunity for us to make markets for them. And obviously that would lend itself to improved performance,” Citigroup Chief Financial Officer Mark Mason told reporters this week.

Fed Chair Jerome Powell signaled in late September that tapering was imminent. An official announcement is expected in November and the central bank has signaled it will look to halt asset purchases completely by mid-2022 – a timetable seen by some investors as aggressive.

Banks have already benefited from enhanced volatility since Powell’s comments in late September, which led to a spike in Treasury yields and a decline in equity markets. That led to a pick-up in trading volumes at the end of the third quarter and the start of the fourth quarter, executives say.

“It is possible we will see bouts of volatility associated with the tapering,” Morgan Stanley Chief Financial Officer Sharon Yeshaya said in an interview Thursday, adding that she doesn’t expect a repeat of 2013’s ‘taper tantrum.’

At that time, the Fed’s decision to put the brakes on a quantitative easing program sent markets into a frenzy as investors dumped riskier assets in favor of ‘safe havens,’ leading to a spike in government bond yields and sharp falls in equity markets.

Fed officials are confident of avoiding that scenario this time around by giving markets enough advance warning of their intentions.

“The sweet spot is where you have some volatility but not enough to disrupt the broader capital markets which have been an important contributor to healthy trading results over the past year,” said JMP Securities analyst Devin Ryan.

Third-quarter results from the biggest U.S. banks this week showed strong performances in equities trading, boosted by stocks hitting record highs, but a more subdued showing in bond trading reflecting calm in those markets.

Investors are anticipating activity will ramp up again in the run-up to tapering, when it eventually begins.

“It will certainly be a positive,” said Patrick Kaser at Brandywine Global Investment Management. “Volatility is a friend to trading businesses.”

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

(Additional reporting by David Henry; Editing by Andrea Ricci)

U.S. Banks Beat Profit Estimates on Economic Rebound, Deals Bonanza

JPMorgan Chase & Co, Citigroup, Well Fargo & Co and Bank of America Corp, seen by analysts and economists as bellwethers of the broader economy, reported a combined profit of $28.7 billion for the third quarter, beating analyst estimates.

Much of that was driven by the release of a combined $6 billion of funds the banks had put aside for pandemic loan losses which have not materialized thanks to extraordinary government stimulus, aid programs and loan repayment holidays.

With the national vaccination roll-out allowing Americans to get back to work and resume socializing after 19 months of pandemic-related business closures and travel restrictions, consumer spending has boomed, the banks said.

Loan growth, a key metric closely-watched by analysts, was mixed across Wall Street however. Some lenders are still struggling to grow their loan books as consumers and businesses, flush with cash from government aid programs, continue to pay down loans.

Overall, though, executives were cautiously optimistic that the economy is on a healthy trajectory, despite some risks on the horizon including the latest wave of COVID-19 infections and inflation worries.

“The outlook for the economy is promising,” Wells Fargo Chief Executive Charles Scharf told analysts on Thursday.

“Consumers’ financial condition remains strong with leverage at its lowest level in 45 years and the debt burden below its long-term average. Companies are also strong as well.”

The bank’s customers have cash and are looking to spend he added, noting consumer customers’ median deposit balances remained above pre-pandemic levels.

JPMorgan said combined debit and credit card spend was up 26% year-on-year, while card payment rates stabilized contributing to modest card loan growth. At Bank of America, combined credit and debit card spend was up 21%.

Spending on Citi-branded credit cards in the United States jumped 24% from a year earlier, but with so many customers paying off balances net interest revenue from credit card accounts fell 3%. In a sign that the trend may be turning, net interest revenue on the cards was up 5% from the second quarter.

“On balance, the earnings across the board are really solid,” said Patrick Kaser, portfolio manager at Brandywine Global Investment Management.

“We’re seeing signs of inflection in loan growth [and] optimism about continued economic strength, re-affirmation of the strength of the consumer.”

‘ON FIRE’

Sizzling capital markets over the past six months have also buoyed the country’s largest lenders, with easy monetary conditions driving record-breaking volumes of both mergers and acquisitions (M&A) and initial public offerings, fueling fees.

That helped cushion a decline in fixed income trading this year, which was turbo-charged last year by intense market volatility.

Investment banking giant Morgan Stanley Inc crushed estimates on Thursday, reporting a $3.58 billion profit, up nearly 38% on the year-ago-quarter. That was thanks in large part to a record $1.27 billion in revenues from advising from advising on deals.

“The investment bank, itself, and M&A, is on fire,” James Gorman, the bank’s chief executive, said in an interview with CNBC after the results. “We’ve got global GDP growth, enormous fiscal stimulus, record low interest rates. People want to transact.”

The highlight for JPMorgan’s third quarter was also its Corporate & Investment Bank division, where advisory fees almost tripled due to strong M&A and equity underwriting. All told, that division reported a 6% rise in net revenue.

At Bank of America, revenue from its equities division rose 33% year-on-year, driven by growth in client financing activities and strong trading performance, while Citigroup said revenues for its equity markets business had jumped 40%.

Goldman Sachs, Wall Street’s most prolific dealmaker, will wrap up bank earnings season on Friday.

While capital markets shone, loan growth remained mixed.

JPMorgan said on Wednesday that loans were up 5% across the bank compared with last year, while Citi was broadly flat. Bank of America and Wells Fargo reported declines in loan growth year-on-year.

However, lending appeared to be trending in the right direction at Bank of America, with loan balances up $21 billion compared with the second quarter of this year.

“We’re still seeing people paying off their bills and revolving less,” said Kaser. “So the lack of loan growth is easily explainable.”

(Writing by Michelle Price; reporting by Anirban Sen, Noor Zainab Hussain, Sohini Podder, Manya Saini, Matt Scuffham, David Henry, and Elizabeth Dilts; Editing by Nick Zieminski)

World Stocks Soft Before U.S. CPI, Oil Near Multi-Year Highs

September U.S. CPI is forecast to show a monthly gain of 0.3%, according to a Reuters poll. Minutes of the U.S. Federal Reserve’s September policy meeting are also due later, while JPMorgan will be the first major bank to report at the unofficial start of the company earnings season.

“The markets are at a crossroads,” said Giles Coghlan, chief currency analyst at HYCM. “Are we are in a stagflationary environment – will we see low growth but high inflation? That’s the concern.”

The MSCI world equity index was flat after dropping in the previous three sessions. S&P futures fell 0.4% after the S&P 500 dropped 0.2% overnight on earnings jitters.

European stocks fell 0.4% and are nearly 5% below their August peak. UK stocks dropped 0.4%.

MSCI’s broadest index of Asia-Pacific shares outside Japan clawed back some ground, rising 0.3% after falling over 1% a day earlier, its worst daily performance in three weeks.

Positive trade figures from China, which showed export growth unexpectedly accelerated in September, provided some relief to those worried about a slowdown in the world’s second-largest economy.

The data helped Chinese blue chips jump 1.2%, despite continued weakness in real estate stocks.

Japan’s Nikkei shed 0.3%, as high energy prices and a weak yen mean trouble for a country that buys the bulk of its oil from overseas.

The dollar fell 0.2% against an index of currencies after hitting a one-year high in the previous session on rising expectations the Fed will announce a tapering of stimulus next month, with interest rate hikes following next year.

Three U.S. Federal Reserve policymakers on Tuesday said the U.S. economy had healed enough for the central bank to begin to withdraw its crisis-era support.

The dollar steadied at 113.58 yen after hitting its highest in nearly three years against the Japanese currency on Tuesday. The euro was up 0.2% at $1.1551.

Ten-year U.S. Treasury yields, meanwhile, steadied at 1.5804% after hitting four-month highs on Tuesday.

Germany’s 10-year yield was unchanged at -0.10% after rising to -0.085% earlier, its highest since late May.

“There is pressure from the inflation story,” said Charles Diebel, head of fixed income at asset manager Mediolanum, pointing to increased expectations of UK rate hikes.

“People are worrying about the same happening elsewhere, they fear inflation will be so persistent central banks will be forced to respond.”

Oil prices lost some froth on the inflation concerns although surging prices for power generation fuel such as coal and natural gas limited losses.

Brent crude was steady at $83.40 a barrel, off Monday’s three-year high of $84.60, while U.S. crude inched lower to $80.63, off Monday’s seven-year high of $82.18. [O/R]

Gold, used as a hedge against inflation, rose 0.3% to $1,765 an ounce.

(Additional reporting by Sujata Rao in London; Editing by Lincoln Feast and Edmund Blair)

Marketmind: Stagflation Blues

A look at the day ahead from Saikat Chatterjee.

So ahead of the release of September U.S. CPI, the big data point of the day, markets are nervous. U.S. stock futures are in the red and major government bond yield curves retain a steepening bias. The growing stagflation fears indicate that risks from the data are asymetric; a higher print than the 0.3% forecast in a Reuters poll could lead to a bigger market reaction than a small miss.

In some ways, it feels like the market is trying to call central banks’ bluff on the “transitory inflation” mantra, with money markets in the developed world moving over the past week to aggressively price interest rate hikes

Indeed, according to Deutsche Bank’s latest monthly survey, for the first time since June, COVID is no longer perceived to be the biggest risk to the markets with the top spot taken by higher inflation and bond yields.

Latest Asian macro data was a mixed bag, with Chinese export growth beating expectations, an unexpected decline in Japanese machinery orders and a fall in Australian consumer confidence.

So global stocks are not too far off May lows while a gauge of currency market volatility is creeping towards 2021 highs. However, the recent rise in Treasury yields has stalled for now and the dollar is on the backfoot against other major currencies

Wednesday also marks the unofficial kick-off of the U.S. corporate earnings season, with JPMorgan the first major bank to report. Banks have had an impressive run this year, with shares outperforming the market by a wide margin but investors will listen out for what bank CEOs say on the outlook.

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

U.S. Federal Reserve Minutes

August Euro area industrial production, UK GDP returns to growth territory in August after contracting in July

Central bank speaker corner: BOE’s Cunliffe, ECB’s Visco

German business software group SAP raised its full-year outlook for a third time on the back of a strong showing in the third-quarter.

Shares in THG Ltd lost over a third of their value on Tuesday just as the company gave a presentation to investors.

Sales at French luxury group LVMH’s fashion and leather goods division rose strongly in the third-quarter.

(Reporting by Saikat Chatterjee)

Price Pressures and Central Banks

Data points beaten by higher bond yields

Many seasoned traders say that the bond market leads all other markets. In that sense, the breakout in yields to new cycle highs tells us that the November Fed taper is a done deal. More than that, we saw yen capitulation at a time when there is still some uncertainty over the growth and risk outlook, which would ordinarily lead investors to seek safe havens.

Ahead of the US CPI and Fed minutes tomorrow, USD/JPY broke to new cycle highs yesterday and the highest level since December 2018 on the back of rising bond yields. The move looks decisive (on the weekly chart especially) with the next area of resistance around 114-114.50 The latter zone served as resistance on numerous occasions back in 2017 and 2018. The major is overbought on the daily RSI which means we should expect a pullback in some fashion soon. Support sits around 112.80.

Solid UK Jobs Data keeps alive BoE rate hike expectations

Money markets went into overdrive yesterday, and none more so than the sterling market. A 25 basis point hike by the Bank of England is now fully priced in for December this year, with some 8 basis points for next month. Notably, this morning’s UK employment figures did not spike higher as many feared, despite the end of the furlough scheme. And August average wage growth came in on the high side.

This means there is not much to push back on this fairly aggressive rate hike pricing. The high inflation story contrasts with multiple economic tailwinds (fuel, energy and food shortages, Brexit) that are expected to hit the UK in the coming months. The rise in GBP/USD stalled yesterday at 1.3673 and we are back into the range trading around 1.36. The July low at 1.3571 offers the next line of support while the 50-day moving average looms above at 1.3725.

US Q3 Earnings Season is upon us

We also have the small matter of the third quarter earnings season to digest too! In the current landscape of elevated equity valuations and record high profit margins, it may pay to be on our guard for a bout of upcoming profit warnings. These results will be all about increasing input costs and how they are driving margin pressures. We might also see more evidence of how physical and digital companies’ performance is diverging.

Banks are first up with results this week form JP Morgan Chase giving us a good handle of the broader (investment) banking environment, while Bank of America will show us a picture of domestic loan demand. Key will be talk on inflation and the outlook for interest rates, and how customers are being impacted.

By Lukman Otunuga Senior Research Analyst

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

JPMorgan’s Dimon Blasts Bitcoin as ‘worthless’, Due for Regulation

“No matter what anyone thinks about it, government is going to regulate it. They are going to regulate it for (anti-money laundering) purposes, for (Bank Secrecy Act) purposes, for tax,” Dimon said, referring to banking regulations in a conversation held virtually by the Institute of International Finance.

Dimon, head of the largest U.S. bank, has been a vocal critic of the digital currency, once calling it a fraud and then later saying he regretted the statement.

This summer, JPMorgan gave wealth management clients access to cryptocurrency funds, meaning the bank’s financial advisers can accept buy and sell orders from clients for five cryptocurrency products.

Stating that his views are different from those of the bank and its board, Dimon said he remains skeptical.

“I personally think that bitcoin is worthless,” Dimon said. “I don’t think you should smoke cigarettes either.”

“Our clients are adults. They disagree. If they want to have access to buy or sell bitcoin – we can’t custody it – but we can give them legitimate, as clean as possible access.”

Bitcoin trading showed no immediate reaction to Dimon’s comments. The cryptocurrency was last up 5% for the day at $57,304.

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

(Reporting by Elizabeth Dilts Marshall and David Henry; Editing by Steve Orlofsky)

Charity Investment Firm CCLA to Offer ESG-Focused Funds to Retail Investors

CCLA, the UK’s largest charity investment manager which was founded in 1958 and manages 14 billion pounds in assets, currently manages investments for charities, religious organisations and the public sector and is owned by its clients.

As demand for ESG investing continues to grow strongly across the market, and after requests from existing clients to invest their personal money in its funds, CCLA said it planned to market them more widely.

“Our long heritage of serving the not-for-profit sector underpins our responsible and sustainable investment approach which is in line with our clients’ community-oriented values,” said CCLA Chief Executive Peter Hugh Smith in a statement.

“Today this is known as ‘ESG investing’. At CCLA, we have always believed that truly healthy and sustainable investment markets require healthy communities and our investment approach has embodied such principles since inception.”

To help oversee the expansion, CCLA also said it was hiring former JPMorgan banker Jasper Berens as head of client relationships and distribution.

“There are not many managers that have achieved such consistent outperformance in their equity and multi-asset funds* and that have been focused 100% on responsible investment for as long and as authentically as CCLA,” Berens said.

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

(Reporting by Simon Jessop; Editing by Bernadette Baum)

SP500 Is On The Edge – What’s Next?

It’s likely that legislation to fund President Biden’s $4 trillion worth of infrastructure and other spending plans will be moving through Congress around the same time. Those bills are expected to include tax increases for businesses and on capital gains. All of that combined could set markets up for a rocky December but for now, investors are turning attention back to economic data and upcoming earnings.

What to watch next week?

Turning to next week, Q3 earnings “unofficially” kick off Wednesday with earnings from big Wall Street banks, including Bank of America, Goldman Sacks, JP Morgan Chase, and Wells Fargo. Other earnings worth noting next week include Fastenal on Tuesday; BlackRock, Delta, and The Progressive Corp. on Wednesday; Alcoa, Citigroup, Dominos Pizza, Morgan Stanley, United Health Group, U.S. Bancorp, and Walgreens on Thursday; and J.B. Hunt, PNC Financial, and Prologis on Friday.

In economic data next week, it’s a packed calendar that will cover all the economic bases from jobs to inflation. Highlights include the Job Openings and Labor Turnover Survey on Tuesday; the Consumer Price Index on Wednesday; the Producer Price Index on Thursday; and Retail Sales, Empire State Manufacturing, Import/Export Prices; Business Inventories, and the preliminary read on October Consumer Sentiment.

Technical analysis

ES ##-## (Daily) 2021_10_10 (6_59_58 PM)

As we expected SP500 bounced back up last week. The market is reaching a critical point – MA50 retest. There is strong accumulation in this market, while the price holds under daily MA50. In these mixed conditions, its better to stay on the sidelines till the market finds a new direction.

If accumulation remains and the price starts building the base above daily MA50, the market will attempt to renew an uptrend. On the other hand, if futures lose accumulation and price gets rejected at MA50, SP500 might continue to drift to the downside. The cycles forecast bottom in October. But we need a price action confirmation.

Best Stocks, Crypto, and ETFs to Watch This Week

Third quarter earnings season starts this week, with reports from Delta Air Lines Inc. (DAL) and a host of commercial banks that include Citigroup Inc. (C) and Bank of America Corp. (BAC). Dow component JPMorgan Chase and Co. (JPM) looks like the best bet after earnings because it’s trading within pennies of an all-time high, with no overhead resistance. Accumulation hasn’t matched positive price action due to mixed messages about inflation but growing fears of rising rates could easily yield higher bank stock prices.

The smart trade on Bitcoin could be to the downside in coming weeks, but don’t sell short too early. The current advance has lifted within 2,000 points of the .786 Fibonacci retracement of the second quarter decline. This harmonic level is euphemistically known as the ‘place that rallies go to die’, with high odds for a reversal and decline that could reach moving average support below 50,000. In turn, that might be a perfect spot to go long for a ride into April’s all-time high.

Moderna Inc. (MRNA), one of the decade’s hottest stocks so far, should be watched for a buying opportunity in coming sessions. The stock posted an all-time high in August and broke down from a double top at the start of October, dropping to a three-month low. However, the selloff is rapidly approaching July’s unfilled gap between 261 and 271, which has narrowly aligned with the 200-day moving average. This level marks a high odds turning point for a high percentage relief rally.

The WTI Crude Oil futures contract tagged 80 for the first time since 2014 on Friday, rallying on limited supply and soaring demand. Energy funds that include SPDR Select Sector Energy ETF (XLE) have underperformed the commodity due to debate about climate change and the transition into alternative energy. Sadly, politicians don’t realize it will take years to replace fossil fuels, raising the potential for $200 crude oil that yields windfall profits and higher stock prices for producers.

Facebook Inc. (FB) got clobbered after a whistleblower told her story to 60 Minutes and Congress, prompting calls for new regulation. The selloff reached the 200-day moving average last week, setting up a key test of support. The stock has tested this level three times since April 2020 and has bounced three times, suggesting that dip buyers will go to work this week. However, aggressive profittaking may be needed, with the declining 50-day moving average above 350 likely to trigger another reversal.

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

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

Earnings Week Ahead: Most Big U.S. Banks, Delta Air Lines, UnitedHealth and Domino’s in Focus

Earnings Calendar For The Week Of October 11

Monday (October 11)

No major earnings are scheduled for release.

Tuesday (October 12)

Ticker Company EPS Forecast
TRYG Tryg KRW1.71
FAST Fastenal $0.42
PNFP Pinnacle Financial Partners $1.55

Wednesday (October 13)

IN THE SPOTLIGHT: BLACKROCK, DELTA AIR LINES

BLACKROCK: The world’s largest asset manager is expected to report its third-quarter earnings of $9.70 per share on Wednesday, which represents year-on-year growth of over 5% from $9.22 per share seen in the same period a year ago.

The New York-based multinational investment management corporation would post revenue growth of over 13% to around $5.0 billion. In the last four consecutive quarters, on average, the investment manager has delivered an earnings surprise of over 9%.

“We believe BlackRock (BLK) is best positioned on the asset mgmt barbell given leading iShares ETF platform, multi-asset & alts combined with technology/Aladdin offerings that should drive ~13% EPS CAGR (2020-23e) via ~6% avg LT organic growth,” noted Michael Cyprys, equity analyst at Morgan Stanley.

“We see further growth ahead for Alts, iShares, international penetration, and the institutional market in the US. Recently acquired Aperio also bolsters solutions offering and organic growth. We expect the premium to widen as BLK takes share in evolving industry and executes on improving organic revenue growth trajectory.”

DELTA AIR LINES: The earnings per share (EPS) is expected to swing back to positive territory for the first time in seven quarters on Wednesday, more than doubling to $0.16 per share compared to a huge loss of -$3.30 per share seen in the same period a year ago.

The Airline company, which provides scheduled air transportation for passengers and cargo throughout the United States and across the world, is forecast to report revenue growth of over 170% in the third quarter to around $8.4 billion. It is worth noting that in the last two years, the airline has beaten consensus earnings estimates just three times.

“Airlines will report 3Q21 results later this month, beginning Oct 13 with Delta Air Lines’ release. We believe 3Q21 started strong, sagged in the middle and then finished strong as people started planning holiday trips,” noted Helane Becker, equity analyst at Cowen.

“We believe 4Q21 guidance will reflect a strong peak, likely >2019 levels while off-peak is likely to lag 2019 levels. Stocks to own include United Airlines (UAL), Alaska Air Group (ALK), Allegiant Travel (ALGT) & Southwest Airlines (LUV).”

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

Ticker Company EPS Forecast
JPM JPMorgan Chase $3.00
BLK BlackRock $9.60
INFY Infosys $0.17
WIT Wipro $0.07
FRC First Republic Bank $1.84
DAL Delta Air Lines $0.16

Thursday (October 14)

IN THE SPOTLIGHT: UNITEDHEALTH, DOMINO’S PIZZA

UNITEDHEALTH: Minnesota-based health insurer is expected to report its third-quarter earnings of $4.41 per share, which represents year-over-year growth of over 25% from $3.51 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 11%. The largest insurance company by Net Premiums would post revenue growth of about 10% to around $72.0 billion.

UnitedHealth Group is the number one Medicare Advantage player with ~28% market share, the number two Medicare PDP player with ~20% market share, and the number two commercial player with ~15% market share,” noted Ricky Goldwasser, equity analyst at Morgan Stanley.

United’s model is enhanced via vertical integration with its OptumRx PBM platform, which is one of the three largest PBMs in the country. With a large lead in the breadth of services offerings and considerable exposure to government businesses, UnitedHealth is well-positioned for any potential changes in the US healthcare system. A strong balance sheet and continued solid cash generation give flexibility for continued M&A.”

DOMINO’S: The world’s largest pizza company is expected to report its third-quarter earnings of $3.11 per share, which represents year-over-year growth of about 25% from $2.49 per share seen in the same quarter a year ago.

The company has beaten consensus earnings per share (EPS) estimates only twice in the last four quarters. The largest pizza chain in the world would post revenue growth of about 7% to around $1.03 billion.

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

Ticker Company EPS Forecast
UNH UnitedHealth $4.41
BAC Bank Of America $0.71
WFC Wells Fargo $1.00
MS Morgan Stanley $1.69
C Citigroup $1.74
USB US Bancorp $1.15
WBA Walgreens Boots Alliance $1.02
AA Alcoa $1.75
DCT DCT Industrial Trust $0.02
TSM Taiwan Semiconductor Mfg $1.04
DPZ Dominos Pizza $3.11
CMC Commercial Metals $1.19

Friday (October 15)

IN THE SPOTLIGHT: GOLDMAN SACHS

The New York-based leading global investment bank is expected to report its third-quarter earnings of $10.11 per share, which represents year-over-year growth of over 4% from $9.68 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 world’s leading investment manager would post revenue growth of over 4% to around $11.25 billion.

“Reason to Buy: Organic growth, solid capital position and steady capital deployment activities continue to enhance Goldman’s prospects. Business diversification offers long-term earnings stability,” noted analysts at ZACKS Research.

“Reason to Sell: Geopolitical concerns and volatile client-activity levels may hinder the top-line growth of Goldman. Further, legal hassles and higher dependence on overseas revenues remain other headwinds.”

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

Ticker Company EPS Forecast
GS Goldman Sachs $10.11
PNC PNC $3.38
TFC Truist Financial Corp $1.09
HON Honeywell International $2.01
GE General Electric $0.51
PLD ProLogis $0.47
VFC VF $1.16
JBHT J B Hunt Transport Services $1.79
GNTX Gentex $0.42
MAN ManpowerGroup $1.91
SXT Sensient Technologies $0.80
ABCB Ameris Bancorp $1.17
ACKAY Arcelik ADR $0.68
BMI Badger Meter $0.50

 

Marketmind: When It Rains, It Pours

A look at the day ahead from Dhara Ranasinghe.

For a second day in a row, U.S. Senate Republicans blocked a bid by President Joe Biden’s Democrats to head off a potentially crippling U.S. credit default.

With federal government funding expiring on Thursday and borrowing authority running out around Oct. 18, the Democrats are trying to head off twin fiscal disasters while also trying to advance Biden’s ambitious legislative agenda.

A shutdown could result in furloughs for hundreds of thousands of federal workers in the middle of a public health crisis.

For markets, the timing couldn’t be worse.

Cash-strapped China Evergrande Group is scrambling to sell some of its assets ahead of the expiry of another deadline to make a bond coupon payment to offshore investors. Several regions of the world’s No. 2 economy are also paralysed by electricity shortages.

Meanwhile a surge in bond yields has unnerved markets globally. Ten-year U.S. yields are up 20 basis points so far this month, their biggest gain since March.

This morning though, Treasury and European bond markets are on more stable ground while European and U.S. stock futures are higher. And sterling, which has taken a beating on fears that fuel crisis will hurt growth, too is recovering.

Markets will be listening carefully to heavyweight policymakers when they speak at a European Central Bank forum later on Wednesday – the ECB’s Christine Lagarde, the Bank of England’s Andrew Bailey and Fed chief Jerome Powell are all on the agenda for 15:45 GMT.

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

-Oil falls for second day as supply-driven rally peters out

– Soft-spoken consensus builder Kishida to become Japan’s next PM

– Japan may kick off process to sell $8.5 bln shares in Japan Post- Bloomberg

– JPMorgan’s Dimon cautions a U.S. default would be ‘potentially catastrophic’

– Emerging markets: Thailand central bank

– Euro zone inflation expectations, consumer sentiment

– Europe earnings: Next

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

(Reporting by Dhara Ranasinghe; editing by Sujata Rao)

Wall Street Group to Revive Talks With China to Find Common Ground – Bloomberg News

Barrick Gold Corp Chairman John Thornton, who is also a veteran of Goldman Sachs Group Inc, is in Beijing meeting with high-ranking Chinese officials, Bloomberg said, citing two people with knowledge of the matter.

According to Bloomberg, Thornton is one of the chairs of the influential group dubbed China-U.S. Financial Roundtable that was conceived during escalating tensions between the U.S. and China in 2018, with the talks featuring emissaries from U.S. finance and senior Chinese regulatory officials.

Previous meetings between Chinese officials and Wall Street banks have included participants such as BlackRock, Vanguard, JPMorgan and Fidelity.

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

(Reporting by Bhargav Acharya in Bengaluru; Editing by Kim Coghill)

 

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.

Wall Street Investment Banks Cut China Growth Forecasts

Chinese trade data released over the weekend undershot forecasts, while figures out on Monday showed inflation rising in the country’s factory sector, potentially adding extra strains.

JPMorgan reduced its quarter-on-quarter growth estimate for the third three months of the year to 2.0% from 4.3%, and trimmed its full-year forecast to 8.9% from 9.1%.

Morgan Stanley lowered its quarterly forecast to 1.6%, while Goldman cut its estimate to 2.3% from 5.8% and to 8.3% versus 8.6% for the full year.

“Recent developments point at further downside risks to already soft 3Q growth forecasts, related to the spread of the Delta variant, a series of regulatory changes in new economy sectors, and erosion of market confidence,” JPMorgan’s analysts said.

Both JPMorgan and Morgan Stanley also predicted Chinese authorities would respond with support measures.

On the monetary policy front, JPMorgan said the People’s Bank of China’s main policy rates were likely to be trimmed by 5 basis points in the fourth quarter, while it would deliver two more 50 basis point cuts to banks’ reserve requirements (RRR), the first in October and another in January.

It has already provided one cut last month.

Morgan Stanley said it expected one 50 bps RRR cut before the end of the year and that government bond issuance could accelerate in coming months to support infrastructure investment.

“A mild deceleration in exports in 2H and an ongoing slowdown in domestic demand amid Delta resurgence mean policy support could ramp up in coming months,” the bank said.

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

(Reporting by Marc JonesEditing by David Goodman and David Holmes)

JPMorgan Joins The Club. Wealthy Clients Can Now Gain Access To Cryptos

JPMorgan Chase has become the latest US investment bank to allow its wealthy clients to gain exposure to cryptocurrencies via investment funds.

JPMorgan’s Wealthy Clients Can Now Buy And Sell Crypto Funds

JPMorgan Chase, one of the leading banks in the United States, has reportedly allowed its wealthy clients to gain access to Bitcoin and a host of other cryptocurrencies. This is according to sources familiar with the matter who told Business Insider.

According to the report, the bank has given its nod of approval to its financial advisors, allowing them to grant wealthy clients access to cryptocurrencies via crypto funds. The report added that JPMorgan is eager to grow its wealth management business and has approved the access to cryptocurrency funds.

Per the report, wealthy clients can gain access to cryptocurrencies via funds such as Osprey Funds’ Bitcoin Trust, Grayscale’s Bitcoin Trust GBTC, Bitcoin Cash Trust, Ethereum Trust, and Ethereum Classic vehicles. The sources stated that the financial advisors had been advised to start taking buy and sell orders from their wealthy clients starting July 19.

Investment Banks Are Opening Up To Cryptocurrencies

The cryptocurrency market has gained massive institutional investors over the past year. The interest from wealthy clients and institutional investors convinced some of the major banks such as JPMorgan, Morgan Stanley, Goldman Sachs and Citigroup to look at cryptocurrencies in a positive light.

The investment bank announced in April this year that it is working on allowing its wealthy clients to access cryptocurrencies. Spokespersons for both Grayscale and Osprey Funds told Business Insider that their funds are available to JPMorgan’s clients.

BTC/USD chart. Source: FXEMPIRE

By making this move, JPMorgan joins the likes of Morgan Stanley and Goldman Sachs in offering access to cryptocurrencies. Morgan Stanley partnered with Galaxy Digital in April to offer wealthy clients access to bitcoin funds. The wealthy clients are those with at least $2 million in invested assets.

Bitcoin’s price is up by over 1% over the past 24 hours as it slowly climbs towards the $32k region. The rally comes after Bitcoin fell below the $30k mark last week.

JPMorgan Board Gives CEO 1.5 Million Stock Options to Stick Around

(Corrects in fifth paragraph to state net share gains must be held until 2031, not 2013)

“This special award reflects the board’s desire for Mr. Dimon to continue to lead the firm for a further significant number of years,” the bank’s board said in a filing.

The board considered what it called “the importance of Mr. Dimon’s continuing, long-term stewardship” when approving the reward, which is structured in a way intended to encourage continued good performance.

Dimon, who has led the bank as CEO since December 2005, cannot exercise the options for at least 5 years. Any net shares he gains from the options must be held until 2031, according to the filing.

The reward will vest so long as Dimon remains employed by JPMorgan, or if he leaves the bank for government office or because of a disability, according to the filing.

(Reporting by Noor Zainab Hussain in Bengaluru and Elizabeth Dilts Marshall in New York; Editing by Chris Reese)

Stock of the Day: JP Morgan

After Friday’s analysis of Intesa Sanpaolo, we continue our journey through the banking sector.

First, look at the chart on JP Morgan. We have a beautiful head and shoulders pattern. The formation started in February however its fate is being decided as we speak, while the price is currently testing the neckline (blue) after drawing the right shoulder.

JPM.XNYS Daily

What will happen with the neckline will decide the future direction of JPM. We’re still waiting for the open bell in the US but yesterday’s session ended with a small victory for buyers. The price managed to defend the neckline with the false bearish breakout pattern (red). Usually, this kind of formation is a great buy signal.

If we combine that with a generally positive sentiment on stocks (another case of buying the dip!) we get a very bullish mixture here. Current sentiment on JPM seems positive and will stay this way as long as the price stays above the neckline.

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

Nasdaq Ends Lower as Investors Sell Big Tech

Amazon, Apple Tesla and Facebook all fell. Nvidia tumbled around 4%.

The S&P 500 technology sector index ended a four-day winning streak. Earlier this week, investors’ favor for heavyweight growth stocks pushed the S&P 500 and the Nasdaq to record highs.

The S&P 500 energy sector index fell more than 1% and tracked a drop in crude prices on expectations of more supply after a compromise agreement between leading OPEC producers.

Fresh data showed the number of Americans filing new claims for unemployment benefits fell last week to a 16-month low, while worker shortages and bottlenecks in the supply chain have frustrated efforts by businesses to ramp up production to meet strong demand for goods and services.

Federal Reserve Chair Jerome Powell told lawmakers he anticipated the shortages and high inflation would abate. Yet many investors still worry that more sustained inflation could lead to a sooner-than-expected tightening of monetary policy.

“People are very nervous and concerned about inflation, tax rates and the (2022 midterm) election. Those three things are very much on people’s minds,” said 6 Meridian Chief Investment Officer Andrew Mies, describing recent phone calls with his firm’s clients.

Unofficially, the Dow Jones Industrial Average rose 54.52 points, or 0.16%, to 34,987.75, the S&P 500 lost 14.29 points, or 0.33%, to 4,360.01 and the Nasdaq Composite dropped 101.82 points, or 0.7%, to 14,543.13.

Morgan Stanley dipped as much as 1.2% after it beat expectations for quarterly profit, getting a boost from record investment banking activity even as the trading bonanza that supported results in recent quarters slowed down.

Second-quarter reporting season kicked off this week, with the four largest U.S. lenders – Wells Fargo & Co, Bank of America Corp, Citigroup Inc and JPMorgan Chase & Co – posting a combined $33 billion in profits, but also highlighting the industry’s sensitivity to low interest rates.

Blackstone said late on Wednesday it would pay $2.2 billion for 9.9% stake in American International Group’s life and retirement business. AIG and Blackstone both rallied.

Johnson & Johnson dipped after it voluntarily recalled five aerosol sunscreen products in the United States after detecting a cancer-causing chemical in some samples.

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

(Reporting by Noel Randewich; Additional reporting by Devik Jain and Shreyashi Sanyal in Bengaluru; Editing by Maju Samuel)

 

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)

 

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)