S&P 500 Gets Above 3850 As Bank Stocks Rally

Key Insights

  • Retail Sales and Consumer Sentiment report exceeded analyst expectations, which was bullish for S&P 500. 
  • A strong rally in bank stocks provided significant support to the market. 
  • Trading will remain volatile ahead of the Fed meeting on July 27.

Retail Sales And Consumer Sentiment Reports Beat Expectations

S&P 500 gained strong upside momentum as economic reports indicated that the economy remained in a decent shape despite recession worries.

U.S. Retail Sales increased by 1% month-over-month in June, compared to analyst consensus of 0.8%. The preliminary reading of the Michigan Consumer Sentiment report showed that Consumer Sentiment increased from 50 in June to 51.1 in July, while analysts expected that it would decline to 49.9.

Meanwhile, Industrial Production and Manufacturing Production reports were worse than expected. Industrial Production declined by 0.2% month-over-month in June, while Manufacturing Production decreased by 0.5%.

Traders ignored these weak reports and focused on the better-than expected Retail Sales and Consumer Sentiment reports. It looks that declining probability  of a 100 bps rate hike at the next Fed’s meeting served as the key catalyst for market optimism.

Traders Shrug Off Recession Worries

While stocks are moving higher, traders should note that markets continue to prepare for a potential recession. The 2-year Treasury yield is fluctuating near the 3.10% level, while the yield of 10-year Treasuries is near 2.90%. Typically, an inverted yield curve serves as a reliable indicator of an upcoming recession.

Copper, which is sensitive to global economic outlook, has tested new lows today. Falling copper prices also point to the potential recession.

Today, recession worries were offset by the strong reports from Citigroup and Wells Fargo. These stocks have been under pressure for months, and traders rushed to buy them when the reports indicated that the situation was not as bad as the market expected. In fact, Wells Fargo stock gained 7% despite missing analyst estimates, which shows that market’s expectations were even lower.

From a big picture point of view, trading will likely remain volatile ahead of the Fed meeting at the end of this month.

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

United States OCC Issues Cease & Desist Order Against Anchorage Digital

Key Insights:

  • Anchorage Digital has been asked to take the necessary steps to remedy the issues.
  • The company has 30 days to submit the details of the remedial actions.
  • Anchorage Digital used to be a chartered trust company before it became a bank in 2021.

In a news release, The Office of the Comptroller of the Currency (OCC) issued a Cease and Desist Order today against the Anchorage Digital Bank.

The order comes into effect due to the bank’s failure to adopt and implement a compliance program established by the OCC.

OCC Anchors Anchorage

The action was taken since Anchorage did not take on the compliance program that adequately covers the required Bank Secrecy Act/anti-money laundering (BSA/AML) program elements.

Back in January 2021, Anchorage Trust company was granted conditional approval to convert into the Anchorage Digital Bank, National Association by the OCC.

However, the chartered trust company was required to sign an operating agreement with the OCC under which the BSA and AML requirements were set forth as an enforceable condition of approval.

But as mentioned above, the bank’s failure to meet these standards consequentially led to the cease and desist order from the regulatory body.

Iterating on the same, Acting Comptroller of the Currency Michael J. Hsu said,

“The OCC holds all nationally chartered banks to the same high standards, whether they engage in traditional or novel activities. When institutions fall short, we will take action and hold them accountable to ensure compliance with federal laws and regulations.”

Although the bank has committed to fixing the issues identified by the OCC and will be beginning corrective actions soon. For the same, the OCC has given the time of 15 days for Anchorage’s Board to appoint a Compliance Committee.

And within 30 days, the bank must submit a written action plan detailing the remedial actions necessary to comply with the BSA/AML requirements.

OCC Spares No One

Earlier in January, as reported by FXEmpire, OCC finally terminated a 7-year-long consent order against Wells Fargo and Co. after the bank compensated all of its customers harmed by its faulty product marketing and billing practices.

However, the bank is still working on a separate consent order issued by the OCC in 2018 related to its selling of mortgage and auto insurance products.

Commenting on the same, Wells’ Chief Executive Charlie Scharf then said that satisfying the OCC was a ‘multi-year effort’.

Bank Stocks Will Keep Underperforming. It’s The Business Cycle.

Summary

Bank stocks are sensitive to interest rates.

Interest rates are sensitive to the strength of the business cycle.

The attractiveness of bank stocks depends on the trend of the business cycle. Not interest rates.

My article of January 2021 concluded:

“…… rising yields at the beginning of a business cycle is good news for bank stocks. Yields rising to levels damaging the economy and causing the business cycle to decline is bad news for the banking sector.”

To recognize what is happening now it is useful to review how the banking sector responds to changes in the business cycle.

Chart, pie chart Description automatically generated

Source: The Peter Dag Portfolio Strategy and Management

Business Cycle and Its Phases

The business cycle goes through four distinctive phases. The trends pointing to the end of Phase 4 are:

  • Commodity and inflation are declining.
  • Sales growth is lower than the pace of inventory accumulation.
  • Income after inflation starts rising.
  • Consumer confidence rebounds as consumers respond favorably to the decline of inflation, interest rates, and to the rise of real income.

These favorable developments create the conditions for the business cycle to move into Phase 1. Sales increase because of consumers’ improved financial conditions. Business is forced to boost production to build up inventories to respond to the rising demand. Business will have to hire new people, buy raw materials, and increase borrowing to improve and possibly expand capacity.

These activities place a floor on commodities and interest rates. As the positive feedback continues, improved sales feed into rising inventories, rising employment, and increased borrowing.

This expansion benefits the banking sector, of course, because it provides the liquidity needed to fuel the positive loop thus creating even more growth. This is the time when bank stocks outperform the market.

There is a point, however, when the high level of production places upward pressure on commodities, interest rates, and inflation. The business cycle enters Phase 2, reflecting an even stronger economy.

But rising commodities, interest rates, and inflation eventually have a negative impact on the finances of consumers as it is happening now. Consumer confidence peaks and then declines. Demand for goods slows down.

Business recognizes inventories are now rising too rapidly due to the slower demand and are having a negative impact on earnings. Production is curtailed. Purchases of raw materials are reduced. Hiring is cut. Improvements and expansions of capacity are delayed resulting in lower borrowing, an unwelcome development for banks.

What Phase Are We in Now?

Chart, line chart, histogram Description automatically generated

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

The above chart shows the business cycle indicator updated in real time from market data and reviewed in each issue of The Peter Dag Portfolio Strategy and Management. It shows the previous two cycles (2011-2014 and 2014-2020) and the current one started in 2020.

This indicator and data about growth in heavy truck sales, in income after inflation, in retail sales after inflation, and the action of the defensive market sectors (see below) confirm the business cycle is now declining, reflecting slower economic growth. The business cycle is now in Phase 3.

The slowdown process will continue until the causes that produced it are brought under control and consumers recognizes their finances are improving. This new environment will be characterized by the decline in inflation and interest rates. This process will take place in Phase 4, the most painful phase for consumers and the financial markets.

During Phase 3 and Phase 4 the sectors outperforming the markets are utilities (XLU), healthcare (XLV), staples (XLP), REITs, and long duration Treasury bonds.

The performance of the various sectors keeps repeating as the business cycle swings from periods of stronger to weaker growth.

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

The sectors outperforming the market over the last two hundred days (except for energy) have been the four sectors mentioned above. Their performance confirms the business cycle is declining, reflecting a weakening economy.

The financial sector, and banks in particular, is a cyclical sector outperforming the market during periods of strengthening business cycle.

Chart, line chart, histogram Description automatically generated

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

The above chart shows the ratio of Invesco KBWB bank ETF and the S&P 500 ETF (ratio KBWB/SPY). The ratio rises when bank stocks outperform the market. The ratio declines when bank stocks underperform the market.

The lower panel of the above chart shows the business cycle indicator computed in real-time as reviewed in each issue of The Peter Dag Portfolio Strategy and Management.

The chart shows bank stocks outperform the market (the ratio rises) when the business cycle rises, reflecting a strengthening economy. The ratio declines, reflecting the underperformance of the bank stocks, when the business cycle indicator declines in response to a weakening economy. Chart, histogram Description automatically generated

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

The above chart shows regional banks stocks (ETF: KRE) respond like the major center banks stocks to the changes of the business cycle. They outperform the market when the business cycle indicator rises and underperform the market when the business cycle indicator declines. Chart, histogram Description automatically generated

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

Even large and well managed banks like JP Morgan (JPM) are not immune to the changes in the business cycle as shown in the above chart. The stock of JP Morgan outperforms the market when the business cycle rises and underperforms the market when the business cycle declines.

Key Takeaways

  1. Bank stocks respond to changes of the business cycle and not of interest rates.
  2. Bank stocks outperform the market when the business cycle rises, reflecting a strengthening economy (Phase 1 and Phase 2 of the business cycle).
  3. There is a point when rising interest rates and inflation cause the business cycle to decline. This is the time when bank stocks start underperforming (Phase 3 and Phase 4 of the business cycle).

Citigroup Rebounds From Yearly Lows, Here Is Why

Key Insights

  • Citigroup’s Q1 report beat analyst estimates on both earnings and revenue. 
  • Recent earnings reports from JPMorgan and Wells Fargo were disappointing, so traders rushed to buy Citigroup after a better-than-expected report. 
  • Analyst estimates keep moving lower, and the continuation of this trend may put more pressure on the stock. 

Citigroup Stock Gains Ground After Quarterly Report

Shares of Citigroup gained upside momentum after the company released its first-quarter report.

Citigroup reported revenue of $19.2 billion and earnings of $2.02 per share, beating analyst estimates on both earnings and revenue. The company noted that revenue declined by 2% year-over-year, while earnings decreased by 44%, “driven by higher cost of credit, higher expenses, and the lower revenues”.

While the year-over-year comparison looks bleak, the market expected weaker results from Citigroup, so the stock managed to move further away from recent lows.

What’s Next For Citigroup Stock?

The recent reports from banks have been disappointing. JPMorgan Chase  found itself under strong pressure yesterday, after the company missed analyst estimates on earnings and highlighted “significant geopolitical and economic challenges”. Wells Fargo  moved lower today after reporting a 5% year-over-year revenue decline.

In this environment, Citigroup’s ability to beat analyst estimates provided material support to the stock. However, it remains to be seen whether the current strength will be sustainable.

Bank stocks are moving lower as the market is worried about the negative impact of higher interest rates on the economy. JPMorgan was the bank that  highlighted this issue, but the whole industry will face problems in case companies and consumers feel the pressure from higher rates.

Analyst estimates have been moving lower in recent months, and this trend may be continued due to external factors. At this point, it looks that the risk of further downside remains.

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

Wells Fargo Under Pressure After Mixed Quarter

Wells Fargo & Co. (WFC) is trading lower by more than 6% in Thursday session after beating Q1 2022 earnings-per-share estimates (EPS) by $0.08 and coming up short on revenue. The banking giant posted a profit of $0.88 per-share on a 5.2% year-over-year decline in revenue to $17.52 billion, more than $200 million below $17.82 billion expectations. The company noted lower income from government stimulus programs, just like JP Morgan Chase and Co. (JPM) on Wednesday.

Geopolitical Headwinds and the Fed

Citigroup analyst Keith Horowitz shot blanks when he upgraded the stock to ‘Buy’ ahead of the report, noting “a very strong deposit base and excess liquidity”. Horowitz also insisted that Wells Fargo was “best positioned for higher rates and we see 8% EPS upside in 2023, with limited credit risk”. Unfortunately, the mixed report featured little of the optimism expressed by the analyst, with executives outlining major obstacles to 2022 profitability

Wells Fargo CEO Charlie Scharf looked for scapegoats to explain the 5% year-over-year revenue decline after the release, noting “Our internal indicators continue to point towards the strength of our customers’ financial position, but the Federal Reserve has made it clear that it will take actions necessary to reduce inflation and this will certainly reduce economic growth. In addition, the war in Ukraine adds additional risk to the downside.”

Wall Street and Technical Outlook

Wall Street consensus stands at an ‘Overweight’ rating based upon 16 ‘Buy’, 7 ‘Overweight’, and 5 ‘Hold’ recommendations. No analysts are recommending that shareholders close positions and move to the sidelines. Price targets currently range from a low of $53 to a Street-high $71 while the stock is set to open Thursday’s session more than $6 below the low target. This dismal placement highlights the failure of analysts to properly evaluate Wells’ 2022 growth outlook.

Wells Fargo hit an all-time high at 66.31 in 2018 and plunged to an 11-year low in October 2020. The subsequent uptick reversed at the .786 Fibonacci selloff retracement level in January 2022, yielding a short-lived breakout, followed by a failure swing that undercut 200-day moving average support in March. The stock has been testing that critical level for the last six weeks and could break down in the second quarter, exposing downside into the upper 30s.

Catch up on the latest price action with our new ETF performance breakdown.

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

Stock Markets: Top 3 Things You Need To Know This Week

Keep in mind, this week is the official start of the US corporate earnings season and at the same time, there is going to be a lot of economic and inflation data being released as well as the latest headlines regarding Russia’s war in Ukraine.

It is also a short trading week with stock, bond, and commodity markets closed on Friday for Good Friday, which could bring some added volatility as we get closer to the long weekend.

SP500 Earnings

Most Wall Street traders recognize that the S&P 500 rally off the March 2020 lows was built on extremely strong US corporate earnings power. Several traders and investors are quick to remind us that prior to the Covid outbreak S&P 500 company earnings were averaging around $40/share per quarter. Fast forward to our last earnings report that showed 2021 Q4 earnings and we see an average of $55/share. In other words, there was a +38% jump in earnings from before the pandemic to our last quarterly estimates, which puts us fairly in line with the current price level of the S&P 500. The question is can US corporate earnings continue to show growth?

I worry because interest rates are starting to aggressively creep higher, wage inflation is real, energy inflation is real, the cost of doing business is obviously higher and supply chain dislocations are still creating supply-side imbalances.

China in the Spotlight

Remember, China’s lockdown in Shanghai continues. The lockdown began on March 28 in half the city but has since expanded to its entire population of around 26 million. A trucker shortage and closures of warehouses in Shanghai are also affecting nearby provinces of Zhejiang and Jiangsu, according to a recent note from Citigroup analysts.

The two provinces are major manufacturing hubs that produce about one-third of China’s total exports. Shipping experts warn the fallout will start to be felt in the months ahead as severe dislocations once again drive up shipping costs and exacerbate shortages of raw materials and other essential supplies. There are also lingering concerns about energy prices as Europe continues to debate the possibility of banning Russian oil and gas supplies. Such a move could bring another dramatic rise in prices as available global supplies get spread even more thin.

Data to Watch

The Atlanta Fed is now forecasting just +1.1% Q1 US GDP growth, whereas, three of their last four Quarterly readings were all above +6.1%. At the same time, there are a lot more investors and economists also starting to walk back their global economic growth estimates. Several sources are thinking Ukraine’s economic output will likely contract by -40% to -50%.

More economists are also forecasting a double-digit reduction in Russia’s GDP, as well as much larger reductions in countries like Belarus and Moldova. Growth estimates in the Central Europe region i.e. Bulgaria, Croatia, Hungary, Poland, and Romania are also starting to be reduced.

There was also more talk over the weekend that Russia could eventually start to default on some of its “external debt” for the first time since 1917.

As for this week, all eyes will be on Consumer Price Index, scheduled for release Tuesday morning, and the Producer Price Index scheduled for release Wednesday morning. Both will work to add a bit more color to our current inflation debate.

Also on Wednesday, we get the first batch of Q1 earnings from a few big names like JPMorgan, Black Rock, Bed, Bath & Beyond, and Delta. Then on Thursday the trade will be digesting the latest Retail Sales data and another round of earnings from names like Citigroup, Wells Fargo, Goldman Sachs, Morgan Stanely, and United Health Group.

Keep in mind, several of the largest US banks might be reporting their biggest slowdown in investment banking revenue in years, as more and more “deals” have been getting put on the back-burner. Who knows how long this slowdown will last?

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

Bank of America Says Bitcoin Trades as a Risk Asset

Since the crypto market has become more popular, Bitcoin is one of the principal topics to discuss when it comes to this market.

Alkesh Shah of Bank of America said that Bitcoin has traded as a risk asset since June of 2021. Although its price volatility has fallen since 2013, it is still very volatile compared to S&P 500, Nasdaq 100, and Gold, commented Shah on the research note.

With the bitcoin price being highly volatile, Shah said that Bitcoin would be less traded as an inflation hedge in developed countries, except in countries with “inflationary environments,” which some investors may view it as an inflation hedge.

Alkesh Shah is the head of the Global Cryptocurrency and Digital Asset Strategy research in Bank of America that was launched in October 2021. Simultaneously with the launch, a report called “Digital Assets Primer: Only the first inning” was published.

What Are the Other Banks Saying?

JPMorgan recently estimated that Bitcoin’s “fair value” is about $38,000, when it is trading at the time of writing at $44,008.38. The estimation is based on Bitcoin price volatility being almost four times as gold. The news also said that Bitcoin could reach $150k as a long-term target.

Wells Fargo published a report earlier this week called “Cryptocurrencies – too early or too late?”. The report commented that Bitcoin is perhaps one of the least volatile cryptocurrencies, but “it is still roughly four times more volatile than gold”.

Last month, Goldman Sachs said that Bitcoin will compete with gold as a store of value. As crypto adoption continues, parts of Gold market capitalization will shift into Bitcoin.

BTC Is Up 14.5% in the Last Seven Days

BTC is the biggest cryptocurrency by market capitalization with $835 billion, according to CoinMarketCap. It is trading at $44,008.38 and is up 1.30% in the last 24 hours.

The cryptocurrency is still down 36.12% from its all-time high of $68,900 in November 2021. Since hitting its all-time high it has been in a descending channel until it found support around $35,000 in mid-late January. Then it started an ascending channel, as you can see below:

BTC/USD Chart – Source: FXEmpire.

One sure thing is that banks think of Bitcoin as a highly volatile asset when it compares to traditional financial markets.

If Bitcoin adoption continues and the overall crypto market matures, volatility might decrease.

Bank of America Bounces at Support After Strong Quarter

Bank of America Corp. (BAC) is trading higher by more than 3% in Wednesday’s pre-market after beating Q4 2021 earnings-per-share (EPS) estimates and reporting inline revenues. The banking giant posted a profit of $0.82 per-share, $0.06 higher than expectations, while revenue rose a healthy 9.8% year-over-year to $22.06 billion. The buy-the-news reaction took place at 50-day moving average support, suggesting the stock has posted a tradable low.

Named As Top 2022 Pick

Credit loss reserves improved by $542 million, with BAC recouping funds due to asset quality and macroeconomic improvements, partially offset by loan growth. Non-interest expense rose 6% to $14.7 billion, partially offset by pandemic related costs. Loan and lease balances added $10 billion to $945 billion, with the ending balance rising to $979 billion. The company traded at 15.1x forward earnings estimates ahead of the report, higher than Citigroup Inc. (C) and Well-Fargo and Co. (WFC).

Piper Sandler named Bank of America as the 2022 top pick at year’s end, adding a $57 price target last week. The institution is highly levered to rising rates that should increase overnight lending spreads and add to profits. Current consensus expects that rate increases will add $5 billion to the company’s net interest income by the end of 2023. And, although investment banking is expected to ease after a torrid 2021, it comprised 27% of revenue in the first three quarters. Continued growth in that segment should underpin performance well into 2023.

Wall Street and Technical Outlook

Wall Street consensus stands at a ‘Moderate Buy’ rating based upon 14 ‘Buy’, 2 ‘Overweight’, 8 ‘Hold’, 2 ‘Underweight’, and 1 ‘Sell’ recommendation. Price targets currently range from a low of $40 to a Street-high $64 while the stock is set to open Wednesday’s session about $4 below the median $52 target. Given this placement, Bank of America is well positioned to rally into a test of the multiyear high above $50, posted earlier this month.

Bank of America broke out above 8-year resistance in the 20s in 2016 and tested that level successfully during March 2020’s pandemic decline. The subsequent uptick mounted the Feb. 2020 peak in March 2021, ahead of a buying spike that’s reached within 5 points of the 2006 all-time high. That level marks the obvious target in this advance but keep in mind that old highs also denote major resistance that can take a long time to overcome.

Catch up on the latest price action with our new ETF performance breakdown.

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

In The Spotlight – Big Wall Street Banks as the Main Power in S&P 500

Banks’ earnings

Big Wall Street banks are in the spotlight right out of the gate with Goldman Sachs set to release results before markets open. They will be followed by Bank of America, Morgan Stanley, and U.S. Bancorp tomorrow (Wednesday). Bank results got off to a mixed start on Friday. JPMorgan Chase, Citigroup, and Wells Fargo all topped profit estimates for Q4 but JPMorgan and Citi delivered disappointments in other areas.

In particular, investors are nervous about higher expenses that cut into Q4 profits for both JPMorgan and Citi and which both banks forecast would continue to weigh on results in 2022. JPMorgan and Citi also saw -11% decreases in trading revenue, with fixed income trading down by double digits for both.

There are also signs of slowing loan growth that some analysts worry is an early sign of slowing consumer demand for big-ticket items as inflation continues to climb. While banks will eventually benefit from higher U.S. interest rates that are anticipated in the year ahead, a big pullback in consumer lending is a threat to some of the more lofty Wall Street expectations had for the sector in 2022.

Global economy

Globally, not a lot changed over the extended weekend. China might have provided a bit of a surprise with additional monetary easing into a struggling GDP and sagging real estate prices. It’s worth noting, Omicron has now been detected in Beijing for the first time, just three weeks before the city is due to host the Winter Olympics. Now the Chinese are shutting down and suspending the sale of Olympic tickets to the public.

Tensions remain heated between Hong Kong activists and Chinese government officials. North Korea launched its fourth missile test this month. After North Korea’s missile test last week, the US announced sanctions on eight North Korean and Russian individuals and entities for supporting North Korea’s ballistic missile programs.

Tensions between the U.S. and Russia seem to be headed in the wrong direction with Russia over the weekend moving troops and equipment into Belarus for joint military exercises.

The so-called “Allied Resolve” drills are set to take place near borders with NATO members Poland and Lithuania, as well as Ukraine where Russia has maintained its alarming military presence.

Most U.S. military experts don’t really think Russia has any real intentions of invading Ukraine or any other EU country. However, Western countries also have increased their military presence along borders and other strategic locations which increases the chances that a broader conflict could “accidentally” be sparked.

Europe’s gas supplies are also at risk as Russia continues to dangle the threat of cutting them off. Most of the tension stems from Russia’s demand that former Soviet countries be barred from entering NATO, something the U.S. and other NATO allies have refused.

In the USA, we are heading deeper into earnings season and investors are going to be paying close attention to costs and expenses. As I mentioned, late last week, JPMorgan warned that higher expenses and higher spending on hiring in 2022 could create some headwinds.

Looking ahead, it will be interesting to see how many executive teams start providing guidance and warnings that corporate expenses are rising faster than anticipated and what if any damage will be due to profit margins?

Remember, some companies have said they are passing the additional rising costs on to the consumer while other companies are eating a majority of the higher expenses in an attempt to gain more market share.

How the stock market decides to differentiate the strategy and style could greatly impact money flow and valuations. Goldman Sachs, J.B. Hunt, Charles Schwab, Citrix, Concentrix, and Interactive Brokers report earnings today.

Data to watch

Tomorrow we have Alcoa, Bank of America, Kinder Morgan, Morgan Stanley, Procter & Gamble, and United Airlines.

Thursday we have American Airlines, Baker Hughes, Netflix, and Union Pacific.

Then next week we have big names like Apple, Boeing, Caterpillar, McDonalds, Microsoft and Verizon reporting earnings.

Let’s also not forget next week we have the first Fed FOMC meeting of the new year.

With the U.S. Federal Reserve getting ever closer to implementing its first rate hikes, which most anticipate will begin in March, investors are growing less enchanted with some of the high-growth and momentum stocks that saw outsized share price gains last year.

This trend is most evident in the tech-heavy Nasdaq where nearly half of the index’s stocks have fallen by -50% from their recent peaks. The Nasdaq itself is only down by about -7% from its most recent record high. The selloff has been very much concentrated in highly-leveraged companies that have yet to deliver a profit, as the prospect of higher rates reduce future profit potential. Earnings results from these high-fliers will likely be harshly scrutinized as Wall Street tries to separate the “wheat from the chaff,” so to speak.

On the economic data front, Empire State Manufacturing and the NAHB Housing Market are today’s highlights.

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

Week In Review: Dollar Dips, Red Hot CPI, Disappointing Retail Sales

The mood across financial markets turned cautious on Monday as traders pondered the possibility of the Federal Reserve raising interest rates sooner than expected. Surging Covid-19 cases across the globe also weighed on sentiment, hitting appetite for riskier assets.

Our trade of the week was gold. We questioned whether the precious metal would be in trouble as rising inflation boosted expectations around for higher interest rates. On Tuesday, king dollar weakened, even after Federal Reserve Chairman Jerome Powell stated during his Senate confirming hearing that the central bank was likely to raise interest rates this year.

Mid-week, the US December inflation report showed prices rising at their fastest rate in almost 40 years! The consumer prices index (CPI) jumped to 7% year-on-year, up from 6.8% in November while matching the median forecast from economists surveyed by Bloomberg. We saw the Dollar Index (DXY) slam into 95.00 following the inflation report. Although markets initially offered a calm reaction to the CPI, equity bulls felt the burn on Thursday as rate hike bets rose.

Gold regained its mojo, deriving strength from a weaker dollar and slight pullback in Treasury yields. After experiencing sharp losses last week, the precious metal concluded this week roughly 1.2% higher.

All eyes were on the US retail sales on Friday which disappointed expectations. Sales fell by 1.9% in December, as worries over the Omicron variant and rising inflation hit spending. With this terrible combination hitting household consumption, this could weigh on economic growth in the final quarter of 2022. Interestingly, the probability of a rate hike in March stands at 91.5% as of writing.

In the FX space, the dollar staged a rebound on Friday but still ended the week lower against all G10 currencies. Oil posted a fourth straight weekly gain amid signs that the market is tightening as global consumption remains resilient in the face of Omicron.

In other news, earnings season kicked off with major banks under the spotlight. JPMorgan Chase, the Number 1 U.S. bank by assets showed profit and revenue that topped estimates. Citigroup beat revenue estimates but showed a 26% plunge in profits while Wells Fargo reported better-than-expected fourth-quarter results. With earnings season set to kick into higher gear in the week ahead as more companies publish their fourth-quarter results, it may be wise to fasten your seatbelts for potential volatility!

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.

SPXU: Harnessing Volatility in The S&P 500, to Short the Market With a Three Times Inverse ETF

Fed Chairman’s Powell reassuring statement on Tuesday and inflation figures for 2021 being in line with estimates on Wednesday seem to have appeased bearish sentiments resulting in the S&P 500 rising.

However, there are many different elements that are likely to impact stocks, such as the continuation of the economic recovery, corporate earnings, inflation, supply chain concerns as well as the likelihood of the Omicron variant stressing hospital services. These should result in continued volatility episodes as seen in the S&P 500 ETF Trust ETF (SPY) which tracks the S&P 500 index.

https://static.seekingalpha.com/uploads/2022/1/12/49663886-16420000045920553.png

Source: fxempire.com

In such conditions, people are normally risk-averse, or avoid trading and prefer to wait for some relative calm before looking at stocks. This is the case for most of us, but, there is another option which is to trade the volatility using a tool like the ProShares UltraPro Short S&P500 (SPXU) which inversely tracks S&P 500 at -3 times its daily performance.

This calls for enticing gains as a 5% fall in the SPY can “theoretically” bring you 15% gains, but my own experience has taught me that just putting money in the SPXU at the first sign of a market downturn is unproductive. Instead, I use the chart below which shows the performance of the ProShares ETF from January 2020 to date. It includes the spring 2020 crash subsequent to the World Health Organization declaring Covid to be a pandemic.

Investors will notice that I have calculated the amplitude obtained by subtracting SPXU’s daily low from the daily high. Then I converted the resulting value as a percentage that more vividly represents the volatility induced in the ProShares ETF’s through its daily variations.

Here, the March (spring) 2020 crash resulted in gains of over 30% but this was achieved over a period of many weeks. The second noteworthy point is the above-10% differences which, after occurring four times from June 2020 to February 2021, ceased till November last year.

https://static.seekingalpha.com/uploads/2022/1/12/49663886-16420000046728988.png

Source: Chart built by author with data from finance.yahoo.com

Then, came the December 1 market downturn, induced mostly by tech stock aversion, as investors increasingly rotated into value names. To be realistic, this high-volatility episode may prove to be a lone occurrence, but forthcoming events should constitute catalysts for further fluctuations.

First, the earnings season is to be kicked off by banks on Friday this week, and with investors having already placed a lot of expectations on the financial sector as the main beneficiary of the economic recovery and this, thanks to rising interest rates allowing an increase in net interest margins on loans.

This expectation may suffer if megabanks like JPMorgan Chase (JPM) Citigroup (C) and Wells Fargo (WFC) fail to provide any upside surprises in their fourth-quarter earnings reports. Others like the Bank of America (BAC) and Morgan and Stanley (MS) will follow suit. Then, it will be the turn of the big techs with Microsoft (MSFT) on Jan 25 and Apple (APPL) on Jan 29, with analysts being keen to observe for any effects caused by the semiconductor supply crunch.

Second, there is the VIX (Volatility indicator) also referred to as the “index of fear” whose methodology is based on the stocks forming part of the S&P 500. Higher is the VIX, more are volatility risks, and from its high of 35, the indicator is currently at around 18. Given that this figure is far from the VIX’s above- 85 spike during the spring 2020 market crash, a major downside does not seem imminent, but a near-20 value signifies that volatility is persisting.

This signifies that we are in an environment conducive for gains through the SPXU.

Pursing on a cautionary note, I deliberately used the word theoretically above when mentioning possible gains with the SPXU. In this case, a 5% loss in the SPY will not convert into a 15% gain in the SPXU as some percentage points will be lost due to the compounding effect which is a specific feature of highly leveraged ETFs. The net gain will ultimately depend on the degree of fluctuations (volatility) during the trading period. This discrepancy is evident in the one-week performance chart below where a -1.39% loss of the SPY has not translated into a 4.17% (1.39 x 3) gain in the SPXU, but only a 4.15% gain.

https://static.seekingalpha.com/uploads/2022/1/12/49663886-164200000530492.png

Source: Trading View

Considering the long term, due to the leverage, the ProShares fund has delivered a 55% loss and thus, a buy-and-hold strategy is to be avoided, and it is preferable to use this market shorting tool for the least amount of time possible, preferably one day as per the prospectus. This said I have held it for up to five days after gaining some experience selling it at a loss due to the unpredictability of the market. Looking at portfolio protection, some investors also use the SPXU as a hedging tool to gain from a falling S&P 500. Thus, by hedging, these investors hold on to their stocks instead of passively selling them and taking profit in the expectation of an elusive market crash.

Finally, my advice is to wait for the VIX to go above 20 before placing your bet, and this should happen this week or the next. Also, patience, rigorous monitoring and being prepared to exit with a loss are key ingredients for shorting the market.

Disclosure: I/We are long Apple. This is an investment thesis and is intended for informational purposes. Investors are kindly requested to do additional research before investing.

Wells Fargo Shares Rise Ahead of Q4 Earnings; Target Price $81 in Best Case

Wells Fargo shares gained nearly 15% so far this year ahead of its fourth-quarter earnings, which is expected to enjoy better loan activity and a higher net interest income than that seen in early last year due to favourable industry trends.

The fourth-largest U.S. lender is expected to report its fourth-quarter earnings of $1.11 per share, which represents a year-on-year growth of over 70% from $0.64 per share seen in the same period a year ago.

The San Francisco, California-based multinational financial services company would post revenue growth of more than 4% to $18.8 billion.

Wells Fargo shares rose over 1% to $55.35 on Monday. The stock jumped nearly 15% so far this year after surging nearly 60% in 2021.

Analyst Comments

Wells Fargo (WFC) benefit to EPS from rising rates is the highest in the group, with each 50bps increase in FF driving 15% increase in EPS; 50bps in long-end rates drives 7% to EPS. WFC is in a strong position to monetize higher rates, as cash stands at 15% of earning assets, 7% points above pre-pandemic levels,” noted Betsy Graseck, equity analyst at Morgan Stanley.

WFC is taking action to restructure its business mix as it works to exit the Fed consent order/asset cap and reduce its expense base. Excess capital at Wells stands at 10% of market cap vs. 5% for median Large Cap Bank, enabling a net buyback yield of 10% in 2022 and a total cash return of 12%. Risks around the timing of asset cap removal and further regulatory action remain.”

Wells Fargo Stock Price Forecast

Fifteen analysts who offered stock ratings for Wells Fargo in the last three months forecast the average price in 12 months of $56.62 with a high forecast of $65.00 and a low forecast of $45.00.

The average price target represents a 2.29% change from the last price of $55.35. From those 15 analysts, 11 rated “Buy”, four rated “Hold” while none rated “Sell”, according to Tipranks.

Morgan Stanley gave the base target price of $61 with a high of $81 under a bull scenario and $27 under the worst-case scenario. The firm gave an “Overweight” rating on the multinational financial services company’s stock.

Several other analysts have also updated their stock outlook. Jefferies raised the target price to $64 from $59. BofA Global Research lifted the price objective to $70 from $60. JPMorgan upped the target price to $57 from $53.5. Evercore ISI raised the target price to $60 from $54.

Technical analysis also suggests it is good to buy as 100-day Moving Average and 100-200-day MACD Oscillator signals a buying opportunity.

Check out FX Empire’s earnings calendar

Earnings Season To Push Financial Sector To New Highs?

Bulls mostly believe the sell-off that followed the Fed’s “minutes” last week was overdone and largely a knee-jerk reaction to information that investors already knew. The biggest shock seems to be the confirmation that the Fed is looking to start reducing its balance sheet as soon as this year. St. Louis Fed President James Bullard said that he favors starting to shrink the central bank’s balance sheet shortly after the first rate hike, which he said could come as soon as March.

Senate Banking Committee

Investors hope to get more details this week from Fed Chair Jerome Powell and Fed Governor Lael Brainard at their confirmation hearings before the Senate Banking Committee, where both are expected to get pressed pretty hard about how the central bank intends to counter inflation.

Powell is up first on Tuesday, January 11, followed by Brainard on Thursday, January 13. Brainard is being considered for the Vice-Chair seat. It wouldn’t be surprising to see bulls stick close to the sidelines ahead of those testimonies and possibly even a bit into the start of earnings season.

It’s worth noting that some of the biggest stock declines this week have been those viewed as “riskier” stocks like unprofitable tech companies with lofty valuations and some of the meme-driven trades.

Generally speaking, the prospect of higher interest rates very shortly means high-growth companies-aka heavily dependent on debt-are facing lower profits as the cost of maintaining that debt/growth rises. That means the Q4 earnings season could bring about a reckoning for companies that are viewed as overly leveraged, with Wall Street growing more worried about how they are going to perform in a higher rate environment. At the same time, bulls believe companies that can continue to expand along with the economy will ultimately help drive stock prices even higher in the quarters ahead.

Earnings season unofficially kicks off this Friday, January 14, with big Wall Street banks JP Morgan Chase, Citigroup, and Wells Fargo. Looking ahead to this week, key data includes Wholesale Inventories on Monday; the December Consumer Price Index on Wednesday; the Producer Price Index on Thursday; and Retail Sales, Industrial Capacity, Business Inventories, and Consumer Sentiment on Friday.

XLF to reach 43.50p and more?

XLF forecast analysis

XLF is now the leading sector of the SP500 Index. Moreover, it has all the chances to show outstanding performance in the next 4 – 8 weeks. The accumulation is quite good in this ETF. Besides, the financial sector has a strong seasonal and cyclical tendency to rally in January and February. Indeed, a lot depends on the Q4 earnings.

The banks showed excellent results in the previous three quarters. So, I expect the same now. Also, after XLF has built support near 73, it should text the next critical Gann level at 43.5 (in extension 46).

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

Earnings Week Ahead: Q4 Season Kicks Off With Delta Air Lines and Big Banks Like BlackRock, Citigroup, Wells Fargo and JPMorgan

This week will also bring us an inflation report, US-Russia talks, and a lot of Fed talks. The following is a list of earnings slated for release January 10-14, along with a few previews. Investors will carefully monitor the latest news on the rapidly spreading Omicron coronavirus variant to see how it affects earnings in 2022.

Earnings Calendar For The Week Of January 10

Monday (January 10)

TICKER COMPANY EPS FORECAST
AZZ AZZ $0.82
CMC Commercial Metals $1.29
TLRY Tilray $-0.09

 

Tuesday (January 11)

TICKER COMPANY EPS FORECAST
SNX TD Synnex Corp $2.6
ACI Albertsons $0.55

 

Wednesday (January 12)

TICKER COMPANY EPS FORECAST
INFY Infosys $0.17
JEF Jefferies Financial Group $1.4
KBH KB Home $1.77
SJR Shaw Communications $0.3
VOLT Volt Information Sciences $0.07

 

Thursday (January 13)

IN THE SPOTLIGHT: DELTA AIR LINES

Delta Air Lines, one of the major players in the United States aviation industry, is expected to report earnings per share (EPS) of $0.11 in the fourth quarter, more than doubling compared to a huge loss of $-2.53 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 130% to around $9.2 billion. It is worth noting that in the last two years, the airline has beaten consensus earnings estimates just four times.

According to ZACKS Research, based on strong passenger demand during the holidays, Delta Air Lines raised its guidance for the fourth quarter of 2021. It hopes to achieve “meaningful” profitability in 2022 despite Omicron-induced woes. In the December quarter, the airline expects to make approximately $200 million in adjusted pre-tax profit, according to an SEC filing.

Compared to the same period last year, Delta expects to recover 74% of its adjusted total revenues (excluding third-party refinery sales) in the fourth quarter. In 2022, DAL expects its capacity to reach approximately 90% of its level in 2019. In 2023 and beyond, it expects to achieve pre-pandemic levels of capacity. With adjusted revenues (ex-refinery) exceeding $50 billion in 2024, the company expects earnings per share to surpass $7, ZACKS analysts noted.

“Mgmt. laid out a plan to meet and exceed pre-pandemic financial benchmarks by 2024 by building a best-in-class premium airline. The plan is sound and targets appear conservative though the near-term trajectory remains outside of mgmt.’s control. We see line of sight to the stock doubling from here,” noted Ravi Shanker, equity analyst at Morgan Stanley.

“Why Overweight? Delta Air Lines (DAL) has some of the strongest customer satisfaction numbers among the other Legacy peers, while also commanding a higher PRASM, making it our preferred Legacy carrier. While DAL cannot escape Legacy overhangs (delayed International/corporate recovery, strained balance sheet), it should rise with the industry tide. The risk-reward looks attractive.”

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

TICKER COMPANY EPS FORECAST
TSM Taiwan Semiconductor Manufacturing $1.14

 

Friday (January 14)

IN THE SPOTLIGHT: BLACKROCK, CITIGROUP, JPMORGAN, WELLS FARGO

BLACKROCK: The world’s largest asset manager is expected to report its fourth-quarter earnings of $10.14 per share, which represents a year-on-year decline of about 0.4% from $10.18 per share seen in the same period a year ago.

The New York-based multinational investment management corporation would post revenue growth of nearly 15% to around $5.15 billion. The company has been able to beat earnings per share (EPS) estimates most of the time in the last two years.

“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 ~11% 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.”

CITIGROUP: The New York City-based investment bank is expected to report its fourth-quarter earnings of $1.87 per share, which represents a year-on-year decline of about 10% from $2.07 per share seen in the same period a year ago. But the U.S. third-largest banking institution would post revenue growth of nearly 4% to $17.06 billion.

“While the stock is cheap at 0.6x NTM BVPS, and new CEO is taking strong, proactive strategic action to boost returns closer to peers, we believe these actions will take time to play out,” noted Betsy Graseck, equity analyst at Morgan Stanley.

Citi is exiting 13 consumer businesses in Asia and EMEA, and focusing on higher growth areas of US consumer, Asia WM, International wholesale and consumer payments. These actions could drive ROE higher than the 9% we are modelling for 2023, but we expect the stock will only start to fully reflect this once revenues begins to accelerate. Citi benefits less than peers from higher rates, and we expect some of our more rate sensitive stocks will outperform as the Fed begins to raise rates next year.”

JPMORGAN: The leading global financial services firm with assets over $2 trillion is expected to report its fourth-quarter earnings of $2.94 per share, which represents a year-on-year decline of over 20% from $3.79 per share seen in the same period a year ago. But one of the world’s oldest, largest, and best-known financial institutions would post revenue growth of just over 2% to $29.9 billion.

WELLS FARGO: The fourth-largest U.S. lender is expected to report its fourth-quarter earnings of $1.11 per share, which represents a year-on-year growth of over 70% from $0.64 per share seen in the same period a year ago. The San Francisco, California-based multinational financial services company would post revenue growth of more than 4% to $18.8 billion.

Wells Fargo (WFC) benefit to EPS from rising rates is the highest in the group, with each ~50bps increase in FF driving ~15% increase in EPS; 50bps in long-end rates drives ~7% to EPS WFC is in a strong position to monetize higher rates, as cash stands at 15% of earning assets, 7% points above pre-pandemic levels,” noted Betsy Graseck, equity analyst at Morgan Stanley.

WFC is taking action to restructure its business mix as it works to exit the Fed consent order/asset cap and reduce its expense base. Excess capital at Wells stands at 10% of market cap vs. 5% for median Large Cap Bank, enabling a net buyback yield of 10% in 2022 and a total cash return of 12%. Risks around the timing of asset cap removal and further regulatory action remain.”

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

TICKER COMPANY EPS FORECAST
C Citigroup $1.87
JPM JPMorgan Chase $2.94
BLK BlackRock $10.15
WFC Wells Fargo $1.11

 

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)

Marketmind: No Escaping the Inflation Beast

A look at the day ahead from Dhara Ranasinghe.

Data on Thursday showed China’s factory gate prices grew at their fastest pace on record in September, a day after figures showed another solid increase in U.S. consumer prices.

The take away from markets is that transitory or not, central banks are likely to respond to higher inflation sooner rather than later.

And with minutes from last month’s Federal Reserve meeting showing policymakers’ growing concern about inflation, investors have again brought forward rate-hike expectations.

Fed Funds futures have pulled forward expectations for the first hike from late in 2022 to almost fully price a 25 basis point hike by September.

In addition, money market pricing suggests the Bank of England could move before year-end, the cautious European Central Bank could tighten next year and the overtly dovish Reserve Bank of Australia could raise rates by end-2023 — a trajectory that doesn’t gel with the central bank’s guidance.

Singapore’s central bank on Thursday unexpectedly tightened monetary policy, citing forecasts for higher inflation.

Markets, having priced in higher inflation and a tighter monetary policy outlook, appear to be in a calmer mood in early Europe. Asian shares rallied overnight, European and U.S. stock futures are higher too. U.S. Treasury yields, while a touch higher, are holding below recent multi-month highs.

Still, China property shares fell as investors fretted about a debt crisis in the sector.

The Turkish lira, at record lows versus the dollar, is also in the spotlight after Turkey’s President Tayyip Erdogan dismissed three central bank officials.

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

– BOJ policymaker rules out stimulus withdrawal even after economy recovers

– Taiwan’s TSMC posts 13.8% rise in Q3 profit on global chip demand surge

– Japan dissolves parliament, setting stage for general election

– Data: Spain harmonized inflation rate(Sept), Canada manufacturing sales (Aug)

– United States: Initial Jobless Claims (Oct), Jobless Claims 4-week Average, PPI (Sept), NY Fed Treasury Purchases 22.5 to 30 years, 4-week and 8-week T-Bill Auction

– Central Banks: Fed’s Bowman, Bostic, Barkin, Bullard, Daly and Harker, ECB’s Elderson, and BoE’s Tenreyro and Mann speak

– Earnings: UnitedHealth, Bank of America, Wells Fargo, Morgan Stanley, Citigroup, US Bancorp, Walgreens Boots Alliance, Fast Retailing, Domino’s Pizza.

(Reporting by Dhara Ranasinghe; Editing by Rachel Armstrong)

 

S&P 500 Rises With Growth Stocks; JPMorgan a Drag

The S&P 500 briefly added to gains following the release of minutes from the September Federal Reserve policy meeting.

U.S. central bankers signaled they could start reducing crisis-era support for the economy in mid-November, though they remained divided over how much of a threat high inflation poses and how soon they may need to raise interest rates, the minutes showed.

Earlier, a Labor Department report showed consumer prices increased solidly in September, further strengthening the case for a Fed interest-rate hike.

Shares of JPMorgan Chase & Co fell and were among the biggest drags on the Dow and S&P 500 even though its third-quarter earnings beat expectations, helped by global dealmaking boom and release of more loan loss reserves.

The day’s corporate results kicked off third-quarter earnings for S&P 500 companies.

“My hope is that as we work out way through earnings season that the forward-looking guidance will be good enough that we’ll close the year higher. But right now the market is in a show-me phase,” said Jim Awad, senior managing director at Clearstead Advisors LLC in New York.

Mega-caps growth names including Amazon.com Inc, Google-parent Alphabet and Microsoft Corp all rose.

According to preliminary data, the S&P 500 gained 14.20 points, or 0.33%, to end at 4,364.85 points, while the Nasdaq Composite gained 105.71 points, or 0.73%, to 14,571.64. The Dow Jones Industrial Average rose 4.35 points, or 0.01%, to 34,382.69.

BlackRock Inc also gained after the world’s largest money manager beat quarterly profit estimates as an improving economy helped boost its assets under management, driving up fee income.

Bank of America, Citigroup, Wells Fargo and Morgan Stanley will report results on Thursday, while Goldman Sachs is due to report on Friday.

Analysts expect corporate America to report strong profit growth in the third quarter but worries have been mounting over how supply chain problems, labor shortages and higher energy prices might affect businesses emerging from the pandemic.

Among other stocks, Apple Inc dipped after a report said the iPhone marker was planning to cut production of its iPhone 13.

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

(Additional reporting by Devik Jain and Bansari Mayur Kamdar in Bengaluru; Editing by Arun Koyyur and David Gregorio)

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.

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