13 October 2020

Will Investors Bank on Banking Stocks After Q3 Print?

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News shaping
the markets today

     

What’s happening: The biggest Wall Street banks are all set to kickstart the third-quarter earnings season.

What happened: Banking stocks have not been the best performers year to date, with the pandemic hurting business lending and forcing financial institutions to set aside provisions for bad loans.

JPMorgan Chase and Citigroup, scheduled to report their third-quarter results today, will set the tone not just for the banking sector but the overall US stock market for the current earnings season.

What are the expectations: Although earnings are expected to decline versus pre-covid-19 levels, various analysts have projected an improvement from the previous quarters.

  • JPMorgan is expected to report a 6.2% decline in revenues to $28.21 billion, and a 16.4% downturn in earnings to $2.24 per share.
  • Citigroup’s revenues are projected to decline by 7.8% to $17.13 billion, while earnings could tumble 56.9% to 85 cents per share.

Why it matters: Leading banks in the US have been forced to set aside more cash to prepare themselves for the expected rise in bad loans. With the pandemic crisis persisting, the amount of provisions required remains unpredictable.

Despite credit loss provisions hurting earnings, the additional cash could position banks well when the economy does begin to recover. 

On the other hand, banks are benefitting from higher trading revenues due to volatility in the stock market. The low interest rate environment has also helped financial institutions push more loans.

The Federal Reserve’s limit set for dividends has also kept banks in the spotlight. Apart from this, the Fed has imposed various restrictions for banks after releasing results from its latest stress tests. Banks are scheduled for another stress test, the results of which will be released at the end of the year.

News like this has impacted investor sentiment for banking stocks through the coronavirus crisis. Sentiment has also been hurt by banks pausing their share buyback plans in March.

How shares performed so far: JPMorgan’s shares gained 1.2% to close at $102.44 on Monday, while Citibank’s stock added 2.1% in anticipation of the third-quarter results.

What to watch: Any encouraging news related to a decline in infections or a covid-19 vaccine could lift banking stocks, as financial institutions are highly exposed to the state of the overall economy.

Markets would be monitoring earnings from big banks, as commentary from their top management team is expected to set the tone for the third quarter earnings season.

The Markets Today

     

US stocks will be in focus today, ahead of the start of the third-quarter earnings season.

Context: US indices gained for the fourth straight session on Monday, with technology shares leading the upturn. Bond markets were closed for the Columbus Day holiday.

Details: Hopes of another fiscal stimulus took a hit over the weekend after the Democrats rejected a $1.9 trillion proposal by Treasury Secretary Steven Mnuchin. With lack of progress in stimulus talks, investors are focusing on the US Presidential elections, which is less than three weeks away.

The next season of corporate earnings will kick off today, with analysts expecting S&P 500 companies to report a sequential improvement in earnings. Markets appear bullish, temporarily shrugging off concerns around the resurgence of covid-19 infections in Europe and subsequent lockdown announcements.

The Dow Jones index jumped 250.62 points to settle at 28,837.52 on Monday, driven by gains in Apple and Microsoft. The S&P 500 rose 1.6% to 3,534.22, while the tech-laden Nasdaq 100 spiked 2.6% to 11,876.26.

What to watch: Markets await a basket of economic reports from the US, including the NFIB business optimism index, inflation rate, IBD/TIPP economic optimism index and consumer inflation expectations.

Investors will continue to monitor the ongoing stimulus talks and earnings reports from major companies.

Other Markets: European indices trading closed mostly higher on Monday, with the DAX 30 and French 40 up 0.67% and 0.66%, respectively, while the FTSE 100 index lost 0.25%.

Support & Resistances
for Today

     

market snapshot

     

Futures at 0400 (GMT)

What else to watch today

     

Eurozone’s indicator of economic sentiment, Germany’s economic sentiment index, South Africa’s gold production and mining production, Brazil’s business confidence as well as China’s total vehicle sales.