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Yin and Yang: Strong Earnings From JP Morgan But UK Holds Rates Steady

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July 14, 2016

(Thursday Market Open) It may be a yin and yang type of day, as strength in the U.S. financial sector competes for attention with a disappointing development out of the United Kingdom.

First the good news: JP Morgan (JPM), the first big bank to report Q2 earnings, surprised to the upside, with strong trading revenue helping the company post better-than-expected earnings and revenue. JP Morgan, the biggest U.S. bank in terms of assets, reported a profit of $6.2 billion, or $1.55 a share. That compares with a profit of $6.29 billion, or $1.54 a share, in the same period of 2015. Analysts had expected $1.43 a share. Revenue was more than $1 billion above expectations, boosted by a 23% rise in trading revenue. Trading revenue was led by fixed income.

The bank’s raw numbers tell one story. But another story is in what JP Morgan’s executives will say on their earnings call later Thursday morning. It’s important to listen to what all the banks have to say about the current economic environment and their outlook for the remainder of the year, particularly in the wake of Brexit and as interest rates remain negative or near record lows around the world, a challenging environment to say the least. The U.S. stock market has staged a strong rally the last two weeks, and the financial sector is up over the last month, but still trails the broader market. A major rally needs full participation from financials to have staying power.

The less positive news came from the U.K., where the Bank of England decided to stand pat on interest rates, keeping its benchmark at 0.5%. Many analysts had expected a 25 basis-point cut, and borrowing costs in Europe rose after the decision. The pound rose against the dollar early Thursday, and U.S. Treasury prices fell, causing the 10-year yield to rise four basis points to 1.52%. However, the U.K. rate move isn’t likely to have a big impact on U.S. stocks.

There’s a heavy slate of Fed speakers today, with St. Louis Fed President James Bullard starting the parade at 10 a.m. ET. Following Bullard come appearances by Atlanta Fed President Dennis Lockhart, Kansas City Fed President Esther George, Bullard again later in the evening and Dallas Fed President Rob Kaplan. All this Fed activity could keep investors on their toes, with the next Fed meeting July 26-27 starting to get closer. Last night, Philadelphia Fed President Harker said that he sees up to two interest rate hikes from the Fed by year-end, but the CME Fed futures market is dialing up a zero percent chance of a hike this month and even a very slim possibility of a rate cut. The first chance of a hike, according to futures, is at the September meeting, and even then, chances are low.

Hopes of more stimulus, possibly from Japan, as well as lower expectations of U.S. rate hikes, have helped drive this current rally. With stocks having come so far so fast, it’s worth checking in on the current price-to-earnings ratio (P/E). The forward P/E for the S&P 500 is at 16.6., vs. the 10-year average of 14.3, according to FactSet. Not incredibly high, but not low either.

Now that the SPX has soared to new record highs, where does support lie? At the old resistance levels, according to S&P Global Market Intelligence. That is, at the old record high of 2134, and below that at 2115 and 2100. The bias remains bullish above those levels, the research firm says. At record levels, resistance gets a little fuzzier, but it’s fair to say that 2180 could be a level that may offer some resistance. Sometimes, the market sees some selling pressure late on Fridays, so we’ll see if that happens this week and whether the momentum can last into tomorrow.

Friday morning brings the all-important monthly retail sales report, which could give a good sense of whether the strong jobs growth seen in June translated into more robust consumer spending. At this point, the consensus among analysts is for a 0.2% rise in retail sales, compared with 0.5% a month earlier, according to Briefing.com. With the automobile sector factored out, consensus is for a 0.4% gain. The consumer price index for June also gets released early Friday, and consensus for core CPI is 0.2%, even with the previous month.

Early Thursday saw the release of monthly Producer Price Index (PPI) data, and it came in on the high side at 0.5%, compared with consensus for 0.3%. Core PPI rose 0.4%. From the Fed’s point of view, the numbers could look positive because it’s an inflationary sign. But the trend has to continue for this to tell a full story.

S&P 500

FIGURE 1: IT'S BEEN A LONG ROAD

The S&P 500 (SPX), plotted through Wednesdayon the TD Ameritrade thinkorswim platform, reached new all-time highs this week, making it instructive to look at a 15-year chart to see how far it’s come. The seven-year rally from the 2009 lows continues. Data source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

More Bank Earnings On Tap Friday: With JP Morgan’s earnings out of the way today, two more key banks report before the open on Friday. Consensus for Citigroup (C) earnings is $1.10, compared with $1.45 in the year-ago period, according to Briefing.com. And consensus for Wells Fargo (WFC) earnings is $1.01, down from $1.03 a year ago. The financial sector earnings party continues into next week, when Bank of America (BAC), Goldman Sachs (GS) and Morgan Stanley (MS) all come up to bat. Many investors may focus on forward-looking statements from chief executives about next quarter and beyond, especially what they say about the impact of Brexit on their businesses. Additionally, many banks have been dealing with failing loans to U.S. oil and gas exploration companies at a time when U.S. Treasury yields are squeezing net interest margin. In general, earnings results aren’t expected to be good, some analysts say, though they may differ from bank to bank. The stock market reflects that, with the financial sector down more than 2% year to date, compared with a 5% rise for the S&P 500 Index (SPX).

Biotech On Healthy Run: The Nasdaq Biotechnology Index is moving up, climbing nearly 12% since the Brexit bottom in late June and outpacing the broader market during that time. The rally came even as so-called biosimilars, or knock-off versions of biotech drugs, look like they may soon become more broadly available. A U.S. Food and Drug Administration (FDA) panel voted last Friday in favor of Amgen Inc.’s (AMGN) version of AbbVie Inc.’s (ABBV) Humira, a biotech drug that accounted for sales of nearly $15 billion last year. Then on Monday, FDA staff concluded that Sandoz’s biosimilar and Amgen’s blockbuster biotech drug Enbrel are “highly similar.” Sandoz is the biotech division of Novartis (NVS). Though biosimilars have been available in Europe for a decade, it’s been a slower process in the U.S. The last year, and particularly the last week, has seen some traction for companies trying to sell biosimilars domestically. This is both good and bad for biotechs. They may face more competition, but some, like AMGN, have developed biosimilars of their own so they can participate in this new market.

Many Not Saving Enough for Retirement: The majority of Americans don’t appear to have done much to take responsibility for their financial security after retirement, concluded a July study by the FINRA Foundation, which surveyed 27,564 Americans from June through October of last year. According to FINRA’s study, only 39% of Americans have tried to figure out their retirement needs, up from 37% in 2009, and only 58% have a retirement account, compared with 57% in 2009. “In the decades since the introduction of defined contribution plans, and the related decrease in prevalence of defined benefit pensions, most plan participants have failed to defer enough of the income from their working years to assure a secure retirement,” FINRA concluded. The National Institute on Retirement Security reports that 62% of workers between the ages of 55 and 64 have retirement savings that are less than one times their annual income.

Good Trading,
JJ
@TDAJJKinahan

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