Financials in the spotlight - crosswinds to consider

Thursday, 11th April 2019 13:47 - by Shant

These are arguably tough times for banks, operating in a low-interest rate environment as well as having to contend with credit quality in a globalised system in which geographical exposures have proliferated in recent decades.  Earlier this week, the Fed minutes underpinned the prospect of unchanged rates through 2019, though as is now widely acknowledged, rates markets are starting to price in cuts from the end of the year in response to some of the hot and cold data coming out of the US. 

At this stage, it is fair to assume a slowdown in the pace of growth is what we are facing in the months ahead, though panic over the yield curve inversion has stoked up fears of a recession in the years not too far ahead.  Needless to say, interest rates in the US may have hit neutral already, and it is hard to believe that US banks are not wary of this.  

However, as Jamie Dimon of JPMorgan highlighted, low rates (relatively speaking) can spur increased demand for loans, and current spreads and risk premia may be enough to maintain profitability as long as the economy continues to expand.  This is naturally predicated on a degree of global demand, which as I have been consistent on, is proving to be a tough environment across all (or most) industries and sectors in the land of the corporates.  SMEs are having a tougher time of it due to cost competitiveness, but the anecdotal evidence suggests lending is holding up.  Global markets will have been bolstered by some of the better than expected data coming out of China recently, not least of all the manufacturing PMIs which have signalled a move back into expansionary territory to keep the global growth cycle turning - for now at least.  

Should the US and China come to a resolution on trade, then we can add this to the economic tailwinds which could further boost lending volumes. As we know, investors and corporate management alike take note of changes in sentiment, and this will boost risk appetite to some degree, though some of this seems to have been priced into the financial markets already.  

Against this, investment divisions have had a tough period of having to maintain profitability in markets which have suffered a period of low volatility not seen in a number of years.  Currency and rate markets have been significantly affected by this dynamic, and the roots of this are still largely unknown.  Equities have rallied significantly and outperformed against some expectations in the recovery from the rout seen in Q4 last year, so the early part of 2019 has been profitable for those on the right side of the recovery.  However, macro-based assets have been infinitely more challenging and trading revenues will no doubt have been hit as many have suggested already.   

The schedule for earnings figures (for financials) kicks off tomorrow when JPMorgan announce their results on Friday morning pre-open and they will be joined by Wells Fargo who have naturally underperformed due to the consumer abuse scandals.  Onto Monday and we get reports from Citigroup and Goldman Sachs, while on Tuesday, Bank of America produces its results.  Morgan Stanley rounds off the week of releases on Wednesday.  This period will be significant for the major indices and a healthy aggregate set of numbers could prove supportive on a broader scale. It could send out a strong positive signal on the underlying economy in the US, which continues to outperform significantly on a global landscape, and this is widely reflected in the strength of the Dollar relative to stock market valuations. 

The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.