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UK banks face trio of challenges ahead of earnings

Skyscrapers at London's Canary Wharf show the logos of HSBC and Barclays.

Major UK banks such as HSBC [HSBA], Barclays [BARC], Lloyds [LLOY] and NatWest [NWG] are due to report their latest quarterly results this week. Ahead of the announcements, we spoke to Patrick Reid – a forex trading mentor who co-founded FX consultancy The Adamis Principle – about his outlook for the FTSE 100-listed stocks.  

According to Reid, there are three key factors at play: a strong dollar, the fallout from September’s calamitous mini-budget and looming stagflation in the UK. “The dollar has a lot to say in global risk and sentiment,” he explained. “It’s currently at a decade’s high. If it [goes] another leg higher it will cause a downward spiral for any risk assets, and the banks are at the front of the queue.”

And while bond markets have calmed since the mini-budget, “there is still a lot of risk premium in the gilt markets that hasn’t gone away,” said Reid. “If that continues to calm down, it will be supportive of banks and FTSE companies”. 

However, the economic climate in the UK presents headwinds. On 24 October, news broke of first-time buyer mortgages being withdrawn as consumer confidence sank to all-time lows and the Bank of England forecast four to five quarters of negative growth.

Reid underscored the negative impact of low growth and rising prices, also known as stagflation – something that markets haven’t seen since the 1970s and 80s. “That’s not good for any banks’ earnings,” he warned. 

Banking on a surprise

In order to navigate these choppy waters, banks will have to focus on their strengths. “Banks need to be doing a lot more of what they do well, even better, leaner, and guard themselves against more volatility with a stronger dollar and a lack of fiscal credibility within the government,” Reid said. 

Of the big four, Reid believes that NatWest has the best chance of posting positive numbers this week, but he isn’t expecting “fireworks”. “I feel that any miss will be expected and any uplift will be a sigh of relief and a nice surprise,” he said, adding that he doesn’t imagine any positive movement to sustain itself beyond “a knee-jerk lift in assets”. The structural challenges at hand within the UK government coupled with a “storming dollar” mean that “any uplift might be short-lived”.

However, if all four banks were to post positive results, Reid expects that it would cause “a massive sentiment change”. “If they can deliver in this current environment then when things calm down more, I do see a sentiment shift to the upside, so we’d expect buyers on those dips,” he considers. For Reid, the signals of a stabilising market include when the bond market steadies further, the dollar turns direction and the FTSE 100 rises back above 7,000 points. 

FTSE 100 to break out?

The FTSE 100 did cross the 7,000 resistance mark during trading on 24 October to close at 7,014, though it fell back down to 6,970 the following morning. 

For a breakout to be sustained above the 7,000 level, Reid suggests three “stars” need to align. First, a solid set of earnings from the banking majors. Second, a “credible” fiscal policy from incoming prime minister Rishi Sunak. Third, the dollar topping out, to support risk assets.

“One is not enough. You need all three [of those conditions] for the FTSE to really set on fire,” added Reid. Above the 7,000 level is the mid Bollinger Band of 7,200, and the upper Bollinger Band of 7,600. 

If the FTSE fails to break out this quarter, Reid expects 6,600 to be tested on the downside. Two other factors could conceivably ignite the FTSE 100 in Reid’s opinion. One of these is a closing of the gap between US two-year yields (currently at circa 4.5%) and the terminal rate, which is approaching 5%. “The closer those two become, the less juice there is in the dollar,” says Reid. 

Additionally, the US Federal Reserve appears to be reconsidering its front-loading of interest rate hikes due to the policy’s impact on emerging economies. If the Fed decides to unwind this front-loading, then over the next month the “dollar will go lower and sterling will go higher, which will very much mean that the global reserve is lower,” Reid said. “Therefore, global stocks will go higher, and that will drag the FTSE higher".

Pricing is indicative. Past performance is not a reliable indicator of future results. The interviewee's views and findings are his own and should not be relied upon as the basis of a trading or investment decision.

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