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)

JPMorgan Profit Soars on Recovery but Questions Linger Over Lending Outlook, Competition

Despite the stellar profits, JPMorgan’s shares fell 2.5% as investors focused on emerging challenges for financial stocks. Analysts pressed executives about competition from digital upstarts, prompting Chief Executive Jamie Dimon to exclaim at one point: “My God, the company is doing quite fine.”

The country’s largest bank, seen as a bellwether of the U.S. economy, was boosted by a surge in deal-making and the release of $3 billion it had set aside to cover feared pandemic losses, even as trading revenues slumped 28% from last year’s record-breaking levels.

As the national vaccination drive allows Americans to get back to work, JPMorgan’s results showed consumer spending bouncing back.

Combined debt and credit card spending was up 22% compared with the same quarter in 2019, when spending patterns were more normal. Travel and entertainment card spending returned to growth in June and was up 13% on the same period in 2019.

“We have bright spots in certain pockets and the consumer spend trends are encouraging,” Chief Financial Officer Jeremy Barnum said on a call.

He cautioned, however, that with corporate clients and consumers flush with cash thanks to extraordinary economic stimulus and low interest rates, core lending revenues may not benefit this year from the economy roaring back to life.

JPMorgan’s consumer and community banking unit reported an 8% fall in net interest income, while average loans were down 3%. And even as profits reached $11.9 billion, overall revenues fell 7% to $31.4 billion.

“Rates and loan growth continue to be headwinds,” Evercore ISI analyst Glenn Schorr wrote. He noted, however, that the jump in card spending and 9% organic growth in client investment activity were “clear signs that the economy continues to improve.”

JPMorgan’s corporate and investment banking revenues declined 19%, mainly due to a 44% slump in bond trading from last year’s high, which executives had warned was unsustainable. Buoyed by a boom in initial public offerings, equity markets were a bright spot with revenue up 13%.

On a call with executives, analysts questioned Dimon over the bank’s strategy to compete with digital upstarts at home and abroad – an area Dimon himself has said is a weakness for the industry – sparking frustration from the straight-talking CEO.

“Our bankers, our traders, our credit card, our debit card, our merchant services, our auto business, our digital, it’s doing pretty good,” he responded, acknowledging however that competition from tech-savvy players was “going to be very tough.”

JPMorgan is trying to crack Britain’s consumer finance market with slick technology-based offerings, while back in its home market President Joe Biden’s administration wants to make it easier for fintechs to muscle into the banking sector.

Asked whether JPMorgan would consider boosting its dividend, which it said last month would be $1 per share for the third quarter, Dimon said he wanted to invest in growing the bank.

“We don’t want to raise the dividend so high that it cripples [our] ability to do other things.”

DEAL-MAKING CHEER

While trading revenue slumped 28% to $8.1 billion, the overall Wall Street banking business remained strong, driven by a record volume of large deals. Investment banking revenue rose to $3.4 billion as fees jumped 25%.

Capital markets also remained active and a surge in IPOs more than compensated for a slowdown in blank check mergers.

Goldman Sachs smashed analysts’ estimates for second-quarter profit on Tuesday as Wall Street’s top investment bank also capitalized on record deal-making activity.

JPMorgan’s overall profit exceeded analyst estimates, rising to $11.9 billion, or $3.78 per share, in the quarter ended June 30, from $4.7 billion, or $1.38 per share, a year earlier.

The country’s largest lenders last year put aside billions to cover pandemic losses which, thanks to economic stimulus, did not materialize, allowing them to release those reserves.

Stripping out that boost, quarterly profit was $9.6 billion.

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

(Reporting by Anirban Sen in Bengaluru and Elizabeth Dilts in New York, additional reporting by David Henry and Niket Nishant; Writing by Michelle Price; Editing by Saumyadeb Chakrabarty and Nick Zieminski)

 

 

Big CPI Data, Bank Earnings Beat Expectations, Mixed Sectors

Bank earnings were strong this morning; with JP Morgan Chase (JPM) and Goldman Sachs (GS) having big beats versus analyst expectations. These strong earnings results are being overshadowed mid-session with yet another giant print in CPI data.

Giant CPI Data Print

This morning, the market consensus was for a CPI print of 0.5%, but yet again, we got a huge number at 0.9%. This level is the highest since 2008 and has seemed to put a cloud over today’s trade in New York. The S&P 500 is essentially flat so far today, after dipping 20 handles on the 8:30 AM data release and recuperating all of the CPI news release losses by 10:00 AM. It is one of those kinds of trading sessions so far, but we still have several hours to go today. Tech continues to be strong today, with many individual names lighting up green on the screen. Is the tech trade getting somewhat crowded at these levels?

Figure 1 – E-Mini S&P 500 Futures (September Contract) July 12, 2021 – July 136, 2021, 5 Minute Candles Source stooq.com

Cash traders wouldn’t even know the movement took place.

As today progresses, it feels like the market is digesting the monster CPI print and where capital will be allocated going forward. Interest rates initially fell hard off the data release; but have since been climbing back intraday, as the $SPX has been gaining a little bit of some steam.

There is no question that the S&P 500 is in full resilience mode here. Shaking off the large CPI prints without hesitancy and resuming the upside tells us a story. What the end result of that story is going to be is still up for interpretation. As more time passes and more digestion occurs, the picture will become clearer.

At times like this, I like to allow the data to be digested before making new decisions. This reflection period allows time to manage perspective and outlook on existing opinions/positions.

Figure 2 – TLT iShares 20+ Year Bond ETF June 1, 2021 – July 13, 2021, Daily Candles Source stockcharts.com

It is starting to look more and more that we have experienced a key reversal day in TLT and interest rates. The candle formation July 7th – 9th resembles an “Evening Star” formation, and the uppermost candle on July 8th looks like it marks a short-term top.

An evening star formation is a bearish reversal pattern that continues an uptrend with a long green (up)body day followed by a gapped up small body day, then a down close with the close below the midpoint of the first day.

If you are looking to beef up your candlestick knowledge, I highly suggest checking out ChartSchool on Stockcharts. It has been a valuable resource for 20 years and continues to be an excellent reference and knowledge resource.

Right now, let’s see how the remainder of the session plays out given the big bank earnings results so far; and the large CPI data print.

I still like the idea of staying long the banks and short bonds (higher interest rates) at this time.

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

Rafael Zorabedian
Stock Trading Strategist

Sunshine Profits: Effective Investment through Diligence & Care

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This content is for informational and analytical purposes only. All essays, research, and information found above represent analyses and opinions of Rafael Zorabedian, and Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. You should not construe any such information or other material as investment, financial, or other advice. Nothing contained in this article constitutes a recommendation, endorsement to buy or sell any security or futures contract. Any references to any particular securities or futures contracts are for example and informational purposes only. Seek a licensed professional for investment advice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Information is from sources believed to be reliable; but its accuracy, completeness, and interpretation are not guaranteed. Although the information provided above is based on careful research and sources that are believed to be accurate, Rafael Zorabedian, and his associates do not guarantee the accuracy or thoroughness of the data or information reported. Mr. Zorabedian is not a Registered Investment Advisor. By reading Rafael Zorabedian’s reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Trading, including technical trading, is speculative and high-risk. There is a substantial risk of loss involved in trading, and it is not suitable for everyone. Futures, foreign currency and options trading contains substantial risk and is not for every investor. An investor could potentially lose all or more than the initial investment when trading futures, foreign currencies, margined securities, shorting securities, and trading options. Risk capital is money that can be lost without jeopardizing one’s financial security or lifestyle. Only risk capital should be used for trading and only those with sufficient risk capital should consider trading. Rafael Zorabedian, Sunshine Profits’ employees, affiliates, as well as members of their families may have a short or long position in any securities, futures contracts, options or other financial instruments including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice. Past performance is not indicative of future results. There is a risk of loss in trading.

 

JPMorgan Q2 Earnings Beat Estimates, But Revenue Falls

JPMorgan Chase, the leading global financial services firm with assets over $2 trillion, reported better-than-expected earnings in the second quarter but revenue fell 7% to $31.4 billion, sending its shares down over 2% on Tuesday.

The New York City-based investment bank’s net income rose to $11.9 billion, or $3.78 per share, in the quarter ended June 30, up from $4.7 billion, or $1.38 per share, reported a year ago. That was higher than the market consensus estimates of $3.10 per share.

Net revenue came in at $31.4 billion, down 7%. Noninterest revenue was $18.5 billion, down 7%, driven by lower CIB Markets revenue and $678 million of markups on held-for-sale positions in the bridge book recorded in the prior year, largely offset by higher Investment Banking fees in CIB, higher Card income and higher AWM management fees.

At the time of writing, JPMorgan shares traded 2.38% lower at $154.21 on Tuesday. The stock rose over 27% so far this year.

JPMorgan Stock Price Forecast

Thirteen analysts who offered stock ratings for JPMorgan in the last three months forecast the average price in 12 months of $173.55 with a high forecast of $200.00 and a low forecast of $139.00.

The average price target represents a 12.45% change from the last price of $154.33. From those 13 analysts, eight rated “Buy”, four rated “Hold” while one rated “Sell”, according to Tipranks.

Morgan Stanley gave the stock price forecast of $150 with a high of $192 under a bull scenario and $99 under the worst-case scenario. The firm gave an “Underweight” rating on the investment bank’s stock.

Several other analysts have also updated their stock outlook. BMO cut the target price to $136 from $139. Wells Fargo raised the price target to $200 from $195. Credit Suisse lifted the price target to $170 from $165.

Analyst Comments

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

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

Check out FX Empire’s earnings calendar

Today’s Market Wrap Up and a Glimpse Into Tuesday

The S&P 500 notched another all-time high today as stocks extended Friday’s gains. Tesla was a big winner as CEO Elon Musk took the spotlight. Investors are also optimistic about the second-quarter earnings season, which will feature a couple of big banks on Tuesday.

The Dow Jones Industrial Average tacked on more than 100 points in the session, closing just below the 35,000 threshold, while the tech-heavy Nasdaq was fractionally higher.

Stocks to Watch

Financial stocks JPMorgan and Goldman Sachs will both report their quarterly results on Tuesday before the bell. Investors sent both stocks higher on Monday, with JPMorgan and Goldman up more than 1% and 2%, respectively. Banks have been flexing their strong balance sheets this year and the second quarter is unlikely to be any different.

Disney was a big gainer on the day, advancing by 4%. Investors cheered the fact that the company will raise the price for ESPN+ monthly subscriptions by USD 1 to USD 6.99, effective in August. The price increase bolsters the annual subscription rate to USD 69.99 while the price for the bundle that includes ESPN+, Disney + and Hulu will stay the same. Disney’s ESPN+ boasts nearly 14 million subscribers.

Tesla similarly gained more than 4% in the trading session. Elon Musk was in court to stick up for the electric vehicle company’s decision to scoop up SolarCity in a USD 2.6 billion deal half-a-decade ago. Shareholders allege in a lawsuit that the deal was a bailout of the solar company, which Musk vehemently denies. If things don’t go Musk’s way in court, he could be on the hook for USD 2 billion.

Virgin Galactic on Sunday had a successful spaceflight with founder Richard Branson on board, but the stock took it on the chin today. The company revealed its plans to issue as much as USD 500 million in stock, which sent shares tumbling more than 17% to barely holding onto USD 40.

Look Ahead

If anything can cause the stock market rally to stumble, it could be further signs of inflation. That’s why investors will be paying close attention to the Consumer Price Index data for June that will be released on Tuesday morning. Wells Fargo is predicting a 0.6% increase.

On the earnings front, in addition to financial stocks, consumer staple company PepsiCo will also be reporting second-quarter earnings on Tuesday.

Saudi Aramco Drops Morgan Stanley on Gas Pipelines Deal – Sources

JPMorgan had also advised Aramco on the sale of the oil pipeline business, which was sold to a consortium led by Washington-DC based EIG Global Energy Partners for $12.4 billion.

Aramco has also invited banks to advise on the financing of the deal, sources told Reuters, the second major midstream deal after the sale of the oil pipelines.

The gas pipeline deal will also have an element of staple financing arranged by Aramco for the buyer, similar to the oil pipeline transaction that was backed by $10.5 billion in bank loans, they said.

JPMorgan was also among the lead arrangers for the loan that backed the oil pipeline deal, they said.

Morgan Stanley, which was among the top advisers for Aramco’s $29.4 billion initial public offering in 2019, had also missed out on the oil pipeline advisory role.

It was not immediately clear why Morgan Stanley was dropped on the gas pipeline deal, sources said.

Aramco, Morgan Stanley, JPMorgan and Goldman Sachs declined to comment.

In recent years, Saudi Arabia has become one of the Middle East’s biggest markets for bankers keen to grab a slice of business from new listings, as well as merger and acquisition activities.

Goldman also advised Aramco on its IPO and advised the sovereign fund, the Public Investment Fund, on the sale of its majority stake in Saudi Basic Industries Corp to Aramco, a deal that completed last year.

The gas pipeline stake sale will have a similar structure to the oil pipeline deal, sources have told Reuters earlier.

Aramco has used a lease and lease-back agreement to sell a 49% stake of newly formed Aramco Oil Pipelines Co to the buyer and rights to 25 years of tariff payments for oil carried on its pipelines.

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

(Additional reporting by Hadeel Al Sayegh; Editing by David Gregorio)

 

Stocks Poised to Extend Gains Ahead of Earnings Parade

It’s hard to keep stocks down in this bull market. After tumbling on Thursday, the major indices came back with a vengeance on Friday to finish the week at record levels. Investors had shown concern about the economic recovery hitting a stumbling block, but their fears didn’t last.

On Friday, the S&P 500, Dow Jones Industrial Average and Nasdaq all finished the day at fresh all-time highs. Bank stocks reclaimed lost ground from Thursday’s sell-off while travel stocks including airlines also made a quick turnaround.

Trading in stock index futures suggests that Monday will extend Friday’s gains. On Sunday evening, the S&P 500, Dow and Nasdaq index futures were all trading fractionally higher.

Stocks to Watch

The second-quarter earnings parade will begin in earnest this week on Tuesday. Financial services is among the first sectors to report, with Goldman Sachs and JPMorgan in the pipeline, in addition to consumer company PepsiCo. A Cowen & Co. analyst reiterated her outperform rating on PepsiCo shares in recent days.

The economy has been humming along even better than had been anticipated since the pandemic year. The expectations for S&P 500 companies this earnings season are bullish. Profits are poised to increase 65% vs. year-ago levels, as per Refinitive data, a sign that the pandemic pressure is seemingly in the rearview mirror.

Meme stocks bucked the bullish trend on Friday, though. Barron’s seems to think the meme-stock rally has more fuel left in the tank, based on its latest cover.

AMC Entertainment shaved nearly 4% off its value, while GameStop was down fractionally. Investors also appeared to take some profits in Virgin Galactic, which fell nearly 7% on Friday after Thursday’s blockbuster trading session.

Virgin Galactic is still up approximately 14% in the month of July so far. Richard Branson launched into space on Sunday along with a full crew and returned to Earth without a hitch. Now that space tourism is becoming a reality, demand for Virgin Galactic could potentially increase, though analysts are divided about the stock.

Look Ahead

Investors will be looking to gauge how inflation is looking in the economy when the Consumer Price Index comes out on July 13. Wells Fargo economists are expecting an increase of 0.6% for a 5% YoY rate.

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

Earnings Calendar For The Week Of July 12

Monday (July 12)

Ticker Company EPS Forecast
FRHC Freedom $0.72

 

Tuesday (July 13)

IN THE SPOTLIGHT: JPMORGAN, PEPSICO, GOLDMAN SACHS

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

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

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

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

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

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

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

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

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

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

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

 

Wednesday (July 14)

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

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

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

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

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

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

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

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

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

 

Thursday (July 15)

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

 

Friday (July 16)

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

 

Banks Tighten Grip on FX Market as Algo Trading Rises – Survey

With a combined 30% share of the market in 2020, JP Morgan, UBS and Deutsche Bank took the top 3 positions in the widely watched Euromoney FX survey, as investors made a beeline for vendors offering more electronic trading and algorithmic tools in a year when the COVID-19 pandemic disrupted traditional trading arrangements.

A surge in market volatility due to the pandemic last March coincided with a disruption to trading, traditionally rooted in large trading floors at banks and hedge funds in Hong Kong, London and New York, as offices closed and workers were sent home.

That led to a rise in electronic and algorithmic trading and banks who had heavily invested in the space reaped rich rewards.

“Our investment in technology via our electronic and automated trading business was crucial,” said Chi Nzelu, head of macro eCommerce at JP Morgan, which also held the top spot for 2019. “Algo trading also came to the fore last year, helping to manage cost and access liquidity efficiently.”

The resurgence of the top banks comes at the cost of new entrants like XTX Markets, a dark pool operator, which had climbed steadily up the rankings to stand in third place in 2019, offering deeper trading liquidity and faster execution facilities.

The London-based market maker slipped to fourth place and also ceded market share.

The pandemic-induced volatility early last year widened bid-offer spreads to levels not seen since the global financial crisis, while reducing market depth even in currency pairs considered to be liquid.

While more widespread in equity markets, transacting via computers and high-powered algorithms has become increasingly popular in currency and bond markets in recent years with the pandemic accelerating the trend.

Banks have made heavy investments in algorithmic trading with top institutions offering a variety of solutions for trading currencies. For example, “adaptive algos”, offered by many banks in recent months, can change their trading styles automatically depending on fluctuating market conditions.

A study by Coalition Greenwich last month found the disruptions caused by the pandemic may have long-term effects on the behaviour of FX market participants.

More than 40% of financial FX traders employed algo trading in 2020 with nearly the same share expecting their usage of FX algos to increase in the next year, the study said.

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

(This story corrects name of XTX Markets in 6th paragraph)

(Reporting by Saikat Chatterjee; Editing by Kirsten Donovan)

 

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

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

JPM and BAC Shares Are Down

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

JPM chart. Source: FXEMPIRE

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

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

BAC chart. Source: FXEMPIRE

Investors Concerned By Slow Economic Recovery

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

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

Serious About Expansion? JPMorgan Makes Its Third Fintech Acquisition In A Year

JPMorgan, the biggest bank in the United States by assets, is expanding its market by acquiring more companies in the fintech sector. The bank is set to complete the acquisition of OpenInvest, a San Francisco-based start-up.

JPMorgan to Buy OpenInvest

JPMorgan Chase has agreed to acquire OpenInvest, a San Francisco-based start-up backed by VC firm Andreessen Horowitz and founded by former Bridgewater Associates employees. This latest development continues the bank’s latest tradition of buying fintech companies.

The acquisition of OpenInvest is JPMorgan’s third acquisition of a fintech start-up in six months. The bank acquired 55ip, a firm that automates the construction of tax-efficient portfolios, in December 2020 and followed that with the acquisition of UK-based robo-advisor Nutmeg earlier this month.

Last year, JPMorgan CEO, Jamie Dimon, pointed out that the bank will be more aggressive towards searching for potential acquisitions. The acquisitions would enable banks such as JPMorgan to compete with some of the leading fintech companies, such as PayPal and Square, which have been gaining popularity globally.

Similar to the Nutmeg deal, JPMorgan didn’t disclose how much it would be acquiring OpenInvest. However, the bank said OpenInvest would help its financial advisors customize clients’ investments in ESG, a category that comprises environmental, social and governance factors.

JPMorgan interested in ESG funds

JPMorgan is focusing on ESG due to the rapid growth in the sector. So far this year, ESG funds have attracted massive investments, bringing the total global assets under management to almost $2 trillion.

Mary Callahan Erdoes, CEO of JPMorgan’s asset and wealth management division, said, “Clients are increasingly focused on understanding the environmental, social, and governance impact of their portfolios and using that information to make investment decisions that better align with their goals.”

With OpenInvest, JPMorgan can allow its clients to create highly personalized, dynamic values-based portfolios. This will grant them exposure to ESG investment funds provided by the financial institution.

JPM stock chart. Source: FXEMPIRE

JPMorgan’s stock price is up by less than 1% at Tuesday’s pre-market trading session. Year-to-date, the stock has performed excellently, rising by 22.61% to trade above $154 per share currently.

Today’s Market Wrap Up and a Glimpse Into Tuesday

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

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

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

Stocks to Watch

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

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

Financials in Focus

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

Look Ahead

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

Macron Rolls Out Red Carpet to JPMorgan, Global Ceos in Post-Brexit Push

The U.S. bank’s chief executive, Jamie Dimon, will be one of almost 120 international CEOs travelling to Versailles on Monday for Macron’s now traditional “Choose France” summit in which he pitches France as an investment destination.

The day after, Dimon and Macron will visit JPMorgan’s new hub in central Paris, a stone’s throw away from the Louvre museum, where about 440 employees will be based, many having relocated from London.

Macron’s advisers say that is testament to the appeal of France’s pro-business reforms implemented since the former investment banker’s election in 2017.

JPMorgan’s new trading floor is the latest concrete example of how Brexit is changing Europe’s financial landscape since January.

Paris is at the vanguard of attempts to relocate clearing of euro derivatives from London to the EU after Britain’s “Big Bang” liberalisation of financial rules in the 1980s drained EU financial capitals of such activity and staff.

Global banks like JPMorgan have long used London as their EU gateway, but with Brexit largely severing Britain from the bloc’s financial market, banks have spent millions of dollars on hubs in Paris, Frankfurt and elsewhere in the bloc to avoid disruption.

EY has calculated that over 7,500 financial jobs and $1.3 trillion in assets have moved from London to the EU.

After these initial moves, financial firms are now deciding if there is enough business in London and the EU for two operations to be profitable.

“We may reach a tipping point many years out when it may make sense to move all functions that service Europe out of the United Kingdom and into continental Europe,” Dimon told shareholders in a letter this year.

New Financial think tank said in a report in May that Paris has attracted 102 of 440 firms from Britain that opened units in the EU, second only to Dublin’s 135.

Officials say past tax measures have helped create 3,000 new finance jobs in Paris since Brexit and no new perks are planned this week when Macron courts executives in the palace of Versailles.

“London had everything. Our ambition is for Paris to have everything too,” an advisor to Macron told reporters.

($1 = 0.8380 euros)

(Reporting by Michel Rose and Gwenaelle Barzic in Paris and Huw Jones in London; editing by Clelia Oziel)

FED: What’s Going On Behind the Scenes?

Banking on a Comeback

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

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

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

Please see below:

Source: U.S. FED

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

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

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

Please see below:

Source: U.S. FED

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

But why is all of this so important?

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

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

Please see below:

Source: The White House

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

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

Will We See Another Inflation Surprise?

I wrote on Jun. 22:

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

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

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

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

Please see below:

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

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

Source: KC FED

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

Please see below:

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

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

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

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

Please see below:

Source: NY FED

To explain the significance, I wrote previously:

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

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

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

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

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

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

* * * * *

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

 

JPMorgan Acquires One Of U.K’s Top Robo Advisors Nutmeg

JPMorgan is expanding its overseas retail banking and has acquired one of the U.K’s leading robo advisors Nutmeg. The acquisition deal has been finalized for an undisclosed fee, and it will complement the lunch of its standalone digital bank brand in the United Kingdom.

JPMorgan is expanding its overseas banking business

The biggest bank in the US by assets under management JPMorgan Chase is expanding its overseas retail banking business. The bank has decided to acquire Nutmeg, one of the U.K.’s largest robo-advisors, for an undisclosed fee.

Nutmeg is one of the largest robo advisory firms in the U.K, with over £3.5 billion ($4.9 billion) in assets under management. The firm offers numerous investment accounts, including general investments, pensions and ISAs.

The acquisition is expected to complement JPMorgan’s standalone digital bank, which is expected to launch in the U.K before the end of the year.

JPMorgan strengthening its position in the market

The bank made the move to acquire Nutmeg after JPMorgan CEO Jamie Dimon noted that they would be more aggressive in searching for acquisitions that would help them add capabilities. JPMorgan Chase hasn’t been as active as its competitors, such as Morgan Stanley, in this area over the past few years.

Morgan Stanley acquired E-Trade and Eaton Vance for $20 billion last year, allowing it to challenge other top investment banks in the United States. Sanoke Viswanathan, CEO of international consumer at JPMorgan, said, “We are building Chase in the U.K. from scratch using the very latest technology and putting the customer’s experience at the heart of our offering, principles that Nutmeg shares with us.”

JPM stock chart. Source: FXEMPIRE

JPMorgan’s stock has performed excellently so far this year. JPM began trading at $124 at the start of the year, but it is up by over 20% to currently trade above $150. However, JPM’s price is down by 1.4% so far today despite the Nutmeg acquisition news.

JPMorgan Chase Could Sell Off to 140

Dow component JPMorgan Chase and Co. (JPM) could trade lower in coming weeks after CEO Jamie Dimon warned the banking giant will book about $6 billion in second quarter trading revenue, down 38% over the same period in 2020. Citigroup Inc. (C) CFO Mark Mason reiterated this bearish theme, warning about a 30% decline. Windfall revenue in these divisions bolstered profits during the pandemic, keeping a floor under the banking industry’s equity prices.

Mixed Catalysts Heading Into Third Quarter

Federal Reserve Chairman Jerome Powell eased investor anxiety on Wednesday, declaring the U.S. economy had recovered faster than expected, setting the stage for interest rate hikes that have been off-the-table during the pandemic.  Higher rates steepen the spread between the prices that banks pay for capital and the prices paid by corporations seeking loans, improving profits. However, higher rates can also curtail lending volumes, especially after two or three hikes.

Dimon ended his comments on an upbeat note, reminding listeners that “The quarter last year was exceptional. The last quarter is exceptional. This quarter is what I call more normal…which is still pretty good.” Meanwhile, Mason examined reasons for the surge, noting “If you think back to the second quarter of 2020, at least for Citi, we were looking at Markets revenues back then that were up 50%. We had seen record levels of debt issuances from our clients.”

Wall Street and Technical Outlook

Wall Street consensus on JPMorgan remains bullish despite mixed catalysts, with an ‘Overweight’ rating based upon 15 ‘Buy’, 2 ‘Overweight’, 6 ‘Hold’, and 1 ‘Underweight’ recommendation. In addition, 3 of 27 analysts recommend that shareholders close positions and move to the sidelines. Price targets currently range from a low of $110 to a Street-high $200 while the stock is set to open Thursday’s session more than $15 below the median $171 target.

A JPMorgan uptrend topped out at 141 in January 2020, ahead of a steep pandemic decline. The subsequent uptick reached the prior high in January 2021, yielding a February breakout that added 26 points into early June’s all-time high at 167.44. The pullback since that time has sliced through the 50-day moving average while accumulation has dropped to a 4-month low. This price action raises odds for downside that could offer a buying opportunity in the low 140s.

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

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

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

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

WHICH BANKS ARE AFFECTED?

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

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

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

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

WHAT DID THEY DO?

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

HOW BIG WILL FEE LOSSES BE?

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

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

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

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

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

HOW LONG WILL THE BAN LAST?

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

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

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

WILL IT HIT LIQUIDITY?

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

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

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

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

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

 

Why Citigroup Stock Is Down By 4% Today

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

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

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

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

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

What’s Next For Citigroup Stock?

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

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

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

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

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

Will Amazon Surpass Walmart As The Largest Retailer? JPMorgan Thinks So

Amazon has experienced amazing growth over the past year, and JPMorgan Chase now believes it will surpass Walmart as the largest retailer in the United States.

Amazon’s 2020 growth makes it a Buy

One of the companies to experience huge growth during the pandemic is Amazon. The retail giant dominated the market thanks to its numerous delivery power. As such, JPMorgan now estimates that it would surpass Walmart to become the leading retailer in the United States by next year.

In its analysis of Amazon, JPMorgan analyst Doug Anmuth reiterated that Amazon is one of the leading picks. He told clients Amazon could cross a major milestone next year and surpass Walmart to become the top retailer in the United States. As such, he rated Amazon as a Buy, with the stock currently trading at $3,376 per share.

AMZN chart. Source: FXEMPIRE

JPMorgan said, “The dramatic growth of e-commerce over the past 18 months has accelerated Amazon’s rise to dominance, and even the largest traditional retailer may soon fall behind.”

The prediction came after a stellar 2020 for Amazon, where its e-commerce business helped it catch up to Walmart in the US retail game. In 2019, Amazon had a 6.8% share of US retail sales while Walmart had an 8.9%. However, Amazon’s share jumped to 9.2% last year while Walmart went ahead to 9.3%.

Amazon’s rally came due to the pandemic, causing huge demand for e-commerce services. As of 2020, Amazon had a 51.2% share of e-commerce sales in the United States, while Walmart only had 5.6%.

AMZN dips despite positive analysis

Amazon’s stock (AMZN) is performing poorly at Tuesday’s pre-market trading session despite the Buy recommendation from JPMorgan. At the time of this report, AMZN is trading at $3,369.43, down by 0.43% in the pre-market trading session.

WMT chart. Source: FXEMPIRE

Walmart’s stock (WMT) isn’t fairing any better in the market. WMT is down by 0.50% over the past few hours, and it is currently trading at $139.86 per share.

Year-to-date, Amazon is the better performer. AMZN began the year trading at $3,340 and has added roughly $30 since then. Meanwhile, WMT’s price has declined year-to-date, from $144 to $139.