Wednesday, October 14, 2020

Asia Times: US banks fall across the board as better-than-expected earnings were not enough to outweigh a weak outlook

Tags
  • Dollar
  • Gold
  • Yen
  • Pound
  • Stocks
  • Oil
  • US earnings' season

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Market Recap: US banks fall across the board as better-than-expected earnings were not enough to outweigh a weak outlook

Investors have a risk off day as equities retreat on Tuesday due to stalling stimulus talks and negative vaccine news. As before, investors may be starting to price in the risk of fiscal stimulus measures not being passed before the November 3rd presidential elections. In the latest of developments, US President Donald Trump tweeted "Go big or go home!!" in relation to stimulus measures in the US shortly after Senate Majority Leader Mitch McConnell had said that the Senate will vote next week to replenish funds in the Paycheck Protection Program to help small businesses. While Trump did not directly address McConnell's remarks, the tweet did signal the growing divide among the Trump administration, Democrats and Senate Republicans, likely prompting investors to become slightly more risk averse on chances for a fiscal stimulus package to be passed before the November 3rd presidential elections. That said, downside in regards to this should also be limited, mostly due to expectations that stimulus should be eventually passed, even if it’s after the elections.

On to vaccine news, Johnson & Johnson halted its clinical trials for its experimental vaccine for the novel coronavirus after the company had said late on Monday in the US (or early on Tuesday in Asia) that a participant fell ill. The drug maker is the second company to face a pause in testing, after AstraZeneca's trials was similarly halted earlier last month. AstraZeneca's trials have since resumed in a number of countries, but has yet to be approved by the US Food and Drug Administration (FDA) to continue with its testing. While the stoppage of vaccine trials may be seen as a negative in the short-term as a viable vaccine will likely be expected to face delays, it may help consumer perception that drug makers are taking the necessary measures to ensure that a vaccine is safe. This may benefit the distribution phase of vaccines in the long-run, as the general population becomes more open to getting vaccinated in due future. In the grander scheme of things, vaccine trials running into pauses are also common and not exclusive to the current pandemic. As more vaccine trials move into phase three of testing, which tests vaccinations on a larger sample of the population, there is likely to be more negative news as well. However, this should not largely impact the fact that a vaccine is still likely in due time. As a result, negative impacts on markets may likely only be temporary.

Indexes Daily Change (%) Net Change Closing Price
Dow -0.55% -157.71 28,679.81
S&P500 -0.63% -22.29 3,511.93
Nasdaq -0.10% -12.36 11,863.90
*Source: Bloomberg

S&P500 sectors broadly fell on Tuesday, with most large tech firms supporting major indices from deeper losses. Apple was the exception to this, as the iPhone maker's shares dipped more than 2% after the iPhone 12 launch event on Tuesday. Most analysts appeared to be bullish on the newest product line from Apple (broadly being the iPhone 12 mini, iPhone 12, iPhone 12 Pro and iPhone 12 Pro Max), driven by deeper segmenting of its new iPhone 12 and new 5G capabilities. In contrast, the financial sector led losses in the S&P500 despite better-than-expected earnings from Citigroup and JPMorgan.

Shares of JPMorgan initially rose in premarket trading after the bank reported better-than-expected trading revenue and investment banking fees in its third quarterly earnings report. Its loan loss provisions were also significantly lower than expected, coming in at only US$611 million as opposed to the US$2.24 billion estimate. Despite this, shares fell on US market open and to close -1.62% as CEO Jamie Dimon remarked that economic uncertainty remains the key focus, pushing the major bank to be more conservative on reserves. In addition, Dimon had also said that the its surprisingly good reserve release is not reflective of its improved outlook to the economy. In similar fashion, Citigroup had also beat expectations for its trading revenue and credit provision. But Citi's shares fell upwards of 4% as analysts focused on the US$400 million fine and consent order the company faces. CEO Michael Corbat addressed the issue by saying while solutions are in progress, "this won't be a quick or easy fix". Shares of other major US banks fell as well as a result. Citigroup’s profitability was also in question, which likely added to the downward pressure on its share price.

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Elsewhere, the foreign exchange market was strongly tilted in favour for the dollar. Risk was likely the driver for the day with the dollar and Japanese yen being in the top three performers in the G10 currency basket. The New Zealand dollar surprisingly strengthened against the dollar, possibly on the back of strong import figures from China for September. But the Kiwi lost steam early on Wednesday in Asia, after Reserve Bank of New Zealand (RBNZ) Assistant Governor Christian Hawkesby reiterated the central bank's "go hard, go early" approach on policy. In addition, Hawkesby remarked that negative rates were not a concern for banks, sending even stronger signals that further easing from the RBNZ is coming.

Sterling declines as Brexit negotiations continue to be at a deadlock. With only a couple of days before EU leaders meet for a summit, the risk of having a hard Brexit seems to be increasingly likely. EU Chief Negotiator Michel Barnier had said on Tuesday that not enough progress had been made in talks for them to enter an intensive final phase, likely rattling traders and investors. However, signals from both parties suggests that a trade deal is still more beneficial than not, which is likely as both economies are already facing large amounts of pressure from the Covid-19 pandemic.

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Safe haven assets were broadly skewed towards the downside on Tuesday. Gold and Silver both dipped. The Japanese yen fell against the dollar but rose against the euro. US Treasuries gained across the board. Benchmark 10-year yields declined 4.6bps to 0.73% as a result.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold -1.63% -31.41 1,891.36
Silver -3.84% -0.96 24.14
USD/JPY +0.14% +0.15 105.48
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year -1.4bps 0.14%
10-Year -4.6bps 0.73%
30-Year -6.1bps 1.51%
*Source: Bloomberg

Oil futures advanced on Tuesday on the back of strong crude imports in China for September. Chinese crude imports rose 2.1% month-on-month in September, along with strong vehicle sales, suggesting that demand in the Chinese economy may be returning. However, gains in crude oil prices may have been somewhat curbed by weakening sentiment for US stimulus measures before the US elections in November. OPEC also downgraded its supply forecasts for the next year as the bloc trimmed its estimates for the amount of crude oil that it will need to produce in 2021 as it expects its US counterparts to increase production to balance out the low price of crude. Its downward revisions were also attributed to the Covid-19 pandemic, as it continues to weigh on economic activity. The coalition is set to hold a meeting on Monday for its monthly review on crude oil production, in which analyst expect some deliberation on the next easing of output curbs that is scheduled into effect in January.

Oil Futures Daily Change (%) Net Change Closing Price
Brent +1.75% +0.73 42.45
WTI +1.95% +0.77 40.20
*Source: Bloomberg

Asian stocks look set to track losses in the US, as US stimulus talks stall and Johnson & Johnson's vaccine trials gets put on pause. The Nikkei, KOSPI and ASX200 were each trading lower in the earlier hours of the trading day. Futures tracking major indices were mostly flat, with a positive skew towards the tech-heavy Nasdaq 100. This may be due to the growing positions on companies that are likely to perform well during this earnings season.

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei -0.32% -75.81 23,525.97 9:25:40 AM
KOSPI -0.65% -15.44 2,387.71 9:45:40 AM
ASX200 -0.05% -3.15 6,192.60 9:45:14 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures +0.00% +1.00 28,586.00 9:35:40 AM
US Futures +0.06% +2.25 3,507.00 9:35:42 AM
Nasdaq 100 Futures +0.27% +32.25 12,126.25 9:35:41 AM
*Source: Bloomberg

Economic releases for the day ahead include (all timings in GMT +8):

  • Japan Aug Industrial Production (F) (12.30pm)
  • US Oct 9th Mortgage Applications (MBA) (7pm)

Companies reporting earnings next include (all timings in GMT +8):

  • Bank of America (6.45pm)
  • Goldman Sachs (7.30pm)
  • Wells Fargo (8pm)
  • United Airlines (Bef US Market Open)