As the American banking sector begins pumping out results, our head of markets discusses what to expect.
The palpable sense of relief towards the end of last week in global markets quickly evaporated.
It had seemed that some progress had been made in the talks between the US and China as President Trump unveiled the "Phase One" of an agreement, which included the US postponing the previously planned increase in tariffs on Chinese imports. China simultaneously promised to boost purchases of US agricultural products.
Meanwhile, somewhere in between there were even mildly optimistic noises emanating from Europe that a potential impasse in the Brexit negotiations could be unravelling.
However, investors had time over the weekend to consider what was a relatively sparse set of details in both cases.
For the US and China, not only was it difficult to see that anything had progressed other than the tariff/agricultural headlines, but the question remained of the damage that had already been done to the world’s two largest economies, let alone the dampening of sentiment which has accompanied every comment, tweet and press conference on the spat.
On the face of it, the US markets have had a punchy 2019 – the Dow Jones is up 15% in the year to date, the S&P 500 has added 18.5% and the Nasdaq 21%.
This has partly benefited from a very poor fourth quarter of 2018, though, even going back a full calendar year, the indices are still in positive territory – the Dow Jones up 6% and the S&P 500 and Nasdaq both adding 8%.
This is proof if it were needed that investors require some sustained and positive news and, as the third-quarter earnings season gets into full swing this week, the banks will be central in setting the tone both for the rest of the season as well as beyond.
After all, between them it is difficult to see a part of the economy with which they do not have daily contact: they are exposed to the vagaries of the local and global economies, they oil the wheels of business both to corporates and to individuals in terms of mortgages and loans, and they can see at first hand whether there is any deterioration in credit quality – or bad debts. Similarly, they can set the agenda with their immediate experiences and outlook for the economy in the near future.
It is fair to say that, over the last quarter, the banks have had a number of issues to contend with.
Most obviously, historically low interest rates (and another cut from the Federal Reserve in the period to boot) will continue to put pressure on the banks' net interest margins and income.
The slowdown in Merger & Acquisition activity, coupled with a generally anaemic showing from planned new listings, actual or even withdrawn, will have had an impact on the investment banks.
Meanwhile, if there are any signs of a deteriorating economic and earnings environment, will the lenders put their heads above the parapet and provide lower guidance in the immediate future?
However, disappointment is not guaranteed from the banks, even though it is largely expected. Second-quarter results were, on the whole, better than expected, bolstered by strong consumer demand, particularly in the mortgage space, while cheap valuations for the sector could also provide some support.
Ongoing confirmation of a sharp focus on costs would also be welcomed, as would the lack of any rise in impairment or bad loan charges, while some comments on future loan growth would also keep some of the bears at bay.
This is a checklist which may be difficult to achieve, but if the banks could kick off the reporting season on a positive note, the beneficiaries would be not just the banks themselves, but those who need comforting that the US economy remains in good shape.
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