Markets in Europe have seen a fairly subdued session, despite a lot of important macro news which has centred largely around the banking sector, as well as CPI inflation, with the FTSE 100 managing to edge back towards last week’s highs before giving up its gains, while European markets have slipped slowly lower as the day has progressed.
Banks in Europe initially saw mixed fortunes today, with UK banks higher after the Bank of England lifted all restrictions on the payout of dividends and buybacks in the latest financial stability report. With the reopening of the economy and the success of the vaccination program the central bank appears to think that economic risks have declined somewhat. While today’s announcement is undoubtedly welcome, and likely to raise expectations about the banks reducing their loan loss reserves as the UK economy recovers, shareholders should temper their expectations.
UK banks aren’t US banks and anyone expecting a big increase in payouts needs to temper their optimism, which probably helps explain why despite an initial move higher, the bulk of, if not all of today’s gains have disappeared, for Lloyds, NatWest Group and Barclays. This is probably as a consequence of what is happening to yields, after today’s US inflation report, which has seen short term rates rise and long term rates decline, thus flattening the yield differentials which allows banks to maximise their profits.
By contrast the European Central Bank has adopted a much more cautious approach by maintaining restrictions on payouts while keeping relief from bank leverage restrictions due to the fragile nature of the recovery in Europe.
Travel and leisure stocks have remained under pressure with the likes of easyJet and IAG, down for the second day in a row, on disappointment over yesterday’s reopening announcement from the UK government. The downbeat nature and caution exhibited by yesterday’s statement appears to have also seeped into a sector that is in dire need of a lift, yet with rising Delta variant case rates here as well as in Europe, the prospect of any significant easing of travel restrictions still remains some way off.
Cineworld is also seeing big losses again along with AMC Entertainment in the US, despite the successful launch of Disney’s Black Widow at the weekend in US cinemas. The angst appears to be down to the high number of streaming transactions which also took place, to the tune of $60m, which if replicated with other simultaneous releases would suggest the potential loss of 5-6m worth of potential footfall, if future releases are done the same way, and facemasks remain a requirement to go to see a film in the longer term.
US markets opened slightly lower after US headline CPI saw another big increase, rising to 5.4%, with core prices rising to 4.5%, the highest level since 1991, largely driven by another 10.5% rise in used car prices. We also saw a 1.5% increase in energy prices while food and rent inflation also rose more than expected.
While the Fed may well still be able to argue the continued rise in prices is transitory, given where the increases are occurring, if today’s number doesn’t mark the high-water mark, then Fed officials may start to shift a little bit more uncomfortably as we head into the autumn. For now, markets are buying the transitory narrative, however if the current trend continues “transitory” will be doing a lot more heavy-lifting than it is doing now.
As a consequence of today’s inflation numbers, the US 2-year yield edged higher, while the 10-year headed lower, flattening out the difference between the two. It appears to be this narrowing of yield differentials that bank share prices are reacting to rather than the very impressive earnings numbers JPMorgan and Goldman Sachs announced prior to the US open, with the shares of both lower.
At the end of last month, JPMorgan Chase CEO Jamie Dimon went to great lengths to play down expectations for today’s Q2 earnings numbers, having seen both Q4 of last year and then Q1 set new records. With the bank also pledging to boost its quarterly dividend to $1 a share, investors seem confident that more cash is likely to come their way, after the bank released another $5.2bn in loan loss reserves in Q1.
In today’s Q2 numbers the bank released another $3bn from reserves as the bank delivered another decent quarter. Revenues came in at $31.4bn while profits came in at $3.75c a share, both decent beats on market expectations. On the fixed income side revenues came in below expectations at $4.1bn however in other areas of the business the performance was really strong pointing to a bank that doesn’t appear to have a weak link. Loan growth continues to be a concern, it appears that companies and consumers don't really want to borrow at the moment, while the bank's costs also rose more than expected, coming in at $71bn.
Goldman Sachs also reported some pretty impressive numbers, with revenues coming in at $15.39bn, well above expectations of $12.43bn, however trading revenue fell short at $4.9bn. This was more than offset by investment banking revenue which rose 26% to $3.45bn. Consumer and wealth management, which was expanded to the general public at the beginning of this year, generated a record $1.75bn in revenues in Q2. Profits came in at $15.02c a share well above consensus of $10. Operating expenses were over 17% lower from a year ago, coming on at $8.64bn, and also lower than they were in Q1.
PepsiCo latest Q2 numbers saw revenues rise 12.8% to $19.22bn, and core EPS come in at $1.72c a share, above expectations of $1.53c, while also raising its full year guidance. The best performance came from its drinks division in North America which rose 24% largely as a result of the reopening of sports and entertainment venues. The comparatives from last year also played a part in the solid performance. For the remainder of the year management said that they expected to see 6% growth in organic revenues.
Boeing shares have come under pressure after the company announced it would be cutting production of its 787 Dreamliner to deal with a production issue, which could more than halve expectations over its deliveries for this year.
The US dollar has pushed higher after the latest June CPI numbers came in hotter than expected at 5.4%, increasing the short-term divergence between what US short rates are doing, and the rest of the world, with the US dollar index retesting last week’s highs.
The euro, Canadian dollar and the pound appear to be losing the most ground, with the euro slipping on expectations that next week’s ECB meeting will mark a lower for longer shift in ECB policy when it comes to monetary policy.
Crude oil prices are slightly higher with the stronger US dollar acting as a drag on the upside, pulling back from yesterday’s peaks.
Gold prices initially fell back in the aftermath of the CPI number, however have rebounded higher towards the 200-day MA, after US 10-year yields slipped back into negative territory, after an initial spike higher.