Interactive Investor

Lloyds Bank shares hit two-month low as stock market tumbles

8th July 2021 15:50

Graeme Evans from interactive investor

Lloyds Bank and other lenders are in the news today as investor concerns over the global economy pick up.

Lenders including Lloyds Banking Group (LSE:LLOY) were among the biggest casualties of a sudden turnaround in market fortunes today as worries over global growth resurfaced.

The FTSE 100 index fell as much as 2% to below 7,000, with Lloyds back where it was two months ago at just over 45p after declining 3% in a tough session for a variety of cyclical sectors.

Recent economic data from China suggesting a slowdown in momentum appears to have clouded the outlook, just as markets were coming to terms with the fact that inflationary pressures stemming from the pandemic recovery should only be transitory.

The worries sent investors into the bond market, with the resulting downward pressure on government yields putting renewed pressure on the margin outlook for banking stocks.

Barclays (LSE:BARC) fell 4% and NatWest Group (LSE:NWG) declined 3% in the FTSE 100, while Virgin Money UK (LSE:VMUK) was one of the biggest fallers in the second tier. The outlook for the sector had been looking much brighter, particularly with UK regulators expected to put bosses back in charge of the distribution of dividends and share buybacks for the first since the start of the pandemic.

There was similar pressure on US banking stocks after falls of around 2% for the likes of Citigroup Inc (NYSE:C) and JPMorgan Chase (NYSE:JPM). Wall Street's second-quarter results season gets underway in the next few days, with analysts at Baird predicting they will show the benefit of above normal levels of loan loss reserve releases and elevated capital markets activity.

The rotation out of cyclical stocks reversed big gains in the previous session for London-listed mining giants, with Glencore (LSE:GLEN) among those 4% lower despite the benefit of a broker upgrade.

The commodities trading firm was given a “buy” recommendation and price target of 440p by Bank of America (NYSE:BAC), but shares still fell 13.5p to 304.6p.

Miners are particularly sensitive to the outlook in China, where the government delivered a surprise yesterday by suggesting that additional liquidity may still be needed to support the real economy, including small business. The mood has been further soured by the country's threat of tighter regulation on tech firms.

UBS's chief investment officer Mark Haefele believes the rotation away from cyclical sectors is only temporary. He noted that economic data is being skewed by supply disruptions rather than the weakening of growth.

He expects the 10-year US bond yield to reach 2% by the end of the year, once the US Federal Reserve makes its intentions clearer on the tapering of bond purchases to support the US economy. The yield has fallen to 1.3% in recent days, having been as high as 1.7% at the peak of the market's inflation worries in March.

Haefele told wealth management clients: “Given prospective higher yields, we continue to favour cyclical parts of the equity market, including energy and financials.

“This should be supported by the second-quarter earnings season, which kicks off next week. Earnings growth for value companies should easily outpace that of growth companies. We see the recent underperformance of value stocks as a buying opportunity.”

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