Mixed Feelings: Volcker Rule Eased But Banks Pull Back On Fed’s Stress Test Restrictions

A miss from Nike and newly announced restrictions on banks continue to add to the news flow casting doubt on the pace of the economic recovery, even as the United States has been grappling with increased coronavirus cases.

https://tickertapecdn.tdameritrade.com/assets/images/pages/md/Caution: Return of volatility
5 min read
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Key Takeaways

  • Shares of Nike fall on earnings miss

  • Texas, Florida pause reopening processes

  • Personal spending in May rose more than expected 

(Friday Market Open) It’s been a roller coaster ride for the banks.

After rallying during Thursday’s trading session on news from regulators saying they would ease some restrictions, bank shares pulled back a bit when the Federal Reserve, in a separate announcement that came after yesterday’s close, announced new restrictions on the banking industry as part of its annual stress test. 

In corporate news, Nike (NKE) shares fell nearly 4% after the sports apparel-maker reported a surprise loss in its latest quarter and revenue came in below expectations. The company’s performance was hurt by store closures during pandemic-related lockdowns.

Despite the weak results from NKE, a Wall Street Journal article pointed out that the company’s revenue in China actually grew 1% from a year earlier when you exclude currency changes. And the article noted that the company is in a good position when it comes to cash. Before the earnings miss, NKE shares had been on a solid run, so a 4% pullback isn’t out of the ordinary.  

Still, the overall quarterly performance from NKE, as well as the bank stress-tests requirements, continue to add to the news flow casting doubt on the pace of the economic recovery, even as the United States has been grappling with increased cases of coronavirus, Apple (AAPL) has announced it is re-closing some stores, and Disney (DIS) is postponing reopening California theme parks. Texas and Florida have paused their reopening processes amid surges in coronavirus cases.

At the same time, some areas of the country aren’t doing as poorly, making it hard to get a read on the overall health of the economic recovery and leaving the market waiting for more guidance in an evolving situation. As part of that economic uncertainty, oil prices are still having trouble around the $40 mark because of concerns about demand from a domestic and global economy that’s still on the back foot.

In economic news this morning, government data showed that personal income in May fell less than expected while personal spending rose more than forecast and inflation actually ticked up a little bit. It offers another green-shoots bit of news to an otherwise pretty gloomy outlook. 

Banks in Focus

On Thursday the Financials sector handily outperformed the other S&P 500 Index (SPX) sectors during Thursday’s session on news of relaxed regulations. 

In a move that rolls back some of the regulation enacted in the wake of the financial crisis, regulators said they plan to loosen restrictions on bank investments in venture capital firms and margin requirements for derivatives trading between different affiliates of the same firm (the so-called “Volcker Rule”).

Banks cheered the move as many had said the post-crisis rules went too far. Now it appears the pendulum is swinging the other way, and banks will—theoretically anyway—be able to put more money to work that had previously been tied up.

That’s probably a welcome sign for investors who have been worried about lower interest rates affecting bank profitability and losses the banks might sustain if loans go bad as people suffer financially from the fallout of the coronavirus pandemic. 

Still, interest rates remain a headwind for bank profitability, and the financial sector isn’t out of the woods when it comes to the coronavirus, as the Fed’s stress test pronouncement makes clear. 

In light of the coronavirus, the Fed said it will temporarily not allow big banks to do share buybacks or raise dividend payments. Although that news appears to be pressuring bank shares this morning, it’s arguable that over the long run, the extra business the banks will be able to do because of the relaxed Volcker Rule could outweigh the temporary coronavirus-related restrictions.

Mixed Trade Thursday

The back-and-forth sentiment on the regulatory front was a fitting addition to a day that had already featured mixed sentiment. 

In Thursday’s trade, stocks moved from losses to gains as the rally in bank stocks helped the market overcome continued worry about rising coronavirus cases and worse-than-expected jobless claims figures. SPX bounced off its 200-day moving average, indicating support at around the 3020 level is still holding. A move below this level could take it to the next support level, which is between 2930 and 3000.

Against the backdrop of questions about the sustainability of the economic recovery, weekly unemployment claims came in higher than expected, with initial claims hit 1.48 million, ahead of a Briefing.com consensus of 1.25 million. 

Remember: In six days—not seven, as Friday is a market holiday—the Labor Department comes out with a fresh reading on the employment situation. Considering last month’s surprise rise in nonfarm payrolls, market watchers will be on the lookout for any clues as to the state of employment ahead of the release.

Silver Linings

But there were some bright spots, even outside of the bank rally on Thursday. 

Even though jobless claims were higher than expected, they continued to show a declining trend, falling from the prior week’s upwardly revised 1.54 million print. Both of those figures are below the 1.566 million figure from the week ended June 6.

Continuing claims in the week ended June 13 came in below 20 million for the first time since April. Although the most recent figure of 19.522 million is still staggering, at least it represents a continued decline.

Other economic data was better than expected, with May durable goods orders coming in higher than expected, rising 15.8% month over month when an 11.6% gain had been expected in a Briefing.com consensus. 

CHART OF THE DAY: GOLD AND MINERS. Gold futures (candlestick) have been moving in a generally higher direction after hitting a low amid coronavirus related selling. Higher gold prices tend to be good for gold miners, as represented by the PHLX Gold/Silver Sector Index (XAU) (blue line) and the NYSE Arca Gold Bugs Index (HUI) (purple line). Share prices of gold producers can post outsize gains or losses compared to the metal as gold price changes boost or hurt free cash flow while production costs and debt remain relatively unchanged. Other factors, such as production issues or geopolitical uncertainty can also cause miners’ shares to not track exactly with the gold price. Data sources: Nasdaq Group, ICE Data Services, CME Group. Chart source: The thinkorswim® platform from TD AmeritradeFor illustrative purposes only. Past performance does not guarantee future results.  

What’s Up With Gold? When stocks hit their nadir during the pandemic-led selling in March, gold also hit a near-term bottom. Since then, both equities and the precious metal have been on an uptrend. This week, gold prices hit a multi-year high. The (SPX)isn’t that far from its all-time peak. If you’re accustomed to looking at gold purely as a safe-haven play, you might be scratching your head as to why the two investments have been moving generally in tandem during the pandemic. But gold is a multifaceted investment that can be affected by more influences than just risk-on/risk-off trading. Those nuances that affect gold’s general direction can be worth watching even amid shorter term daily gyrations affected by headlines. 

Cash is King: During the furious selling in February and March, investors were dumping all kinds of assets in search of the relative safety of cash. That led to market participants exiting not only stocks, but also gold, which is one reason the shiny commodity fell alongside equities instead of acting as a haven. Cash was seen as the haven. Still, there was some safe-haven buying that helped keep gold’s slide in check, with the metal losing roughly 10% from its Feb. 19 high to its low in March while stocks lost around 35%. Since their lows in March, stocks and gold have both rallied as investors have become more comfortable holding riskier assets again.

Broader Trends Supporting Gold: But that’s not the only factor supporting gold. Amid the worries about the economy, investors have been piling into gold exchange-traded funds (ETFs), further boosting the metal’s price on top of investor purchases of gold futures. At the same time, interest rate cuts by the Federal Reserve have contributed to reduced yields on U.S. government debt. That’s important because Treasuries and gold typically compete against each other for investor dollars. When interest rates decline, gold—which doesn’t pay interest anyway—becomes more attractive in terms of opportunity cost. Further, the dollar has been on a decline since rallying as a safe haven in March. A lower greenback makes dollar-denominated gold less expensive for those holding other currencies—a factor that can boost demand for the metal.

As we continue to navigate the coronavirus crisis and stock market volatility remains elevated, we might continue to see risk-off days when stocks fall and gold rises in its traditional safe-haven role like we saw earlier this week, or vice versa. But investors may also want to keep the larger trends affecting gold’s price in mind as well.

Good Trading,
JJ
@TDAJJKinahan

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This week’s economic calendar. Source: Briefing.com
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Key Takeaways

  • Shares of Nike fall on earnings miss

  • Texas, Florida pause reopening processes

  • Personal spending in May rose more than expected 

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