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Europe called higher, US banks in good shape says Fed

CMC Markets

Yesterday was a relatively quiet session, as the European trading session started off on a negative note, before the losses were reversed by mid-morning, and indices largely traded sideways. Sentiment in Europe ticked up when US markets opened.

The Federal Deposit Insurance Corporation, a US banking regulator, said it will recommend that certain regulations should be eased. The proposed changes would allow banks to invest more easily in certain investment structures, such as venture capital funds. The other proposal would, in certain circumstances, remove the need for margin to be required when a bank is carrying out a derivatives trade with one of its subsidiaries. The changes would hopefully free up cash for the bank. The banking system is under pressure at the moment so there is an argument to be made that assisting the banks will allow them to operate more freely. On the other hand, if the system is feeling the strain of the pandemic, is now the best time to be cutting back on regulation?

The Fed’s stress test found that several banks could get uncomfortably close to the minimum capital requirements in certain pandemic-connected scenarios. The central bank said that loan losses at the 34 banks that were tested could wind up being a total of $700 billion, in extraordinary circumstances. The Fed will allow US banks to continuing paying dividends, but they will be capped at current levels, and there is chatter that dividends will be cut. If banks want to pay dividends, they must have a formula that is connected to their earnings. The next round of the reporting season will be interesting as dividend polices and provisions for bad loans will be in focus.

US stocks were quiet for much of the session, but they rallied into the close, and banks moved higher ahead of the stress-test results being announced.

Equity markets in South Korea and Japan are both up more than 1% on the back of the positive move seen in the US. The Hang Seng is lower as the US Senate passed a bill that will target companies or countries that are trying to help China chip away at Hong Kong’s autonomy. As it is a public holiday, the stock market in mainland China remained closed.

There was a big rebound in consumer activity as the US durable goods report for May showed growth of 15.8%, and that was in stark contrast to the 18.1% fall posted in April. This adds weight to the idea we could see a V-shaped recovery. The US labour market is slowly but surely improving. The initial jobless claims fell from 1.54 million to 1.48 million. It was the twelfth week in a row the reading fell, but the rate at which it is falling is tapering off. The continuing claims reading fell to 19.52 million from 20.28 million. It is encouraging to see that things are improving in the labour market but the pace appears to be slow. The final reading of US first-quarter GDP was -5%, in line with expectations.

The health crisis in the US is an issue but it had little impact on the markets yesterday. Lately there has been a jump in the number of Covid-19 cases in states like Arizona, Florida, Texas and California, and the surge in cases is a direct result of the easing of restrictions. The authorities in Texas and Florida have taken the decision to pause the reopening of their economies. Connecticut, New York and New Jersey will require people travelling from coronavirus hotspots to self-isolate for two weeks. The loosening of restrictions has undoubtedly prompted a jump in economic activity, but now we are seeing examples of the health crisis impacting the reopening of economies, so dealers will monitor the situation.  

The US dollar pushed higher yesterday and in turn it put pressure on sterling and the euro. Recently, the greenback has performed well when traders have been in risk-off mode, but it gained ground yesterday, even though stocks moved higher too.

At 7.45am, the French consumer confidence report will be posted and economists are expecting a readind of 95, which would be an improvement on the 93 registered in May. The US personal income and consumption readings will be posted at 1.30pm and economists are expecting -6% and 9% respectively. The core PCE reading is tipped to fall from 1% in April to 0.9% in May. The reports will be revealed at 1.30pm. The final reading of the University of Michigan consumer sentiment report, released at 3pm (all UK times), is expected to be 79.

EUR/USD – since early May it has been in an uptrend, but it has undergone a pullback recently. If it breaks below the 1.1168 zone, it could retest 1.1031, the 200-day moving average. Should the wider uptrend continue it might target 1.1495. 

GBP/USD – over the past two weeks it has been in a downtrend and a break below 1.2335 could pave the way for 1.2163 to be tested. A move higher from here might see it target 1.2685, the 200-day moving average.

EUR/GBP – has been in an uptrend for over one month and if it retakes 0.9054, it might target 0.9239. A move lower might find support at 0.8882, the 50-day moving average.  

USD/JPY – has been driving lower for over two weeks and support could come into play at 106.00. A rebound might run into resistance at 108.39, the 200-day moving average. 

 


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