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Easing Syria Tensions, Earnings Optimism Boost Stock Market

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April 12, 2018

(Thursday Market Open) Equity futures were higher Thursday morning as worries about a U.S. missile strike on Syria abated and investors looked forward to what analysts expect to be a bumper Q1 earnings season.

Helping the bullish sentiment this morning: one of the world’s biggest money managers, BlackRock (BLK), reported stronger-than-expected Q1 earnings. With the financial sector in the spotlight tomorrow —  three US megabanks, Wells Fargo (WFC), Citigroup (C) and JPMorgan Chase (JPM) releasing earnings before the open— the strong showing by BLK may indicate hope for a strong earnings season for the financial sector.

Also in earnings news, Delta Airlines (DAL) reported record revenues this morning amid strong demand, especially on some overseas routes. However, DAL said that rising fuel and labor costs had a slight dampening effect on overall revenue.

The market shrugged Thursday as the government said that new applications for unemployment benefits in the week ended April 7 fell to 233,000, from the prior week’s unrevised 242,000.

Yesterday, the three big U.S. indices finished lower, as investors appeared worried about a missile strike against Syria and an increasingly hawkish Fed. Energy and real estate were the only S&P 500 sectors in the green, The tension over the Middle East sent oil prices to a three-year high, which contributed to the lift in the energy sector.

On Wednesday, the release of the minutes from the last Federal Open Market Committee meeting appeared to show a more hawkish central bank. (See below.) But this morning it appears that market participants may be thinking that the Fed is just reiterating what it’s already been signaling.

You can be forgiven for not quite knowing how to trade all this. In fact, this is a good time to keep your trading small and agile. You wouldn’t be alone in confusion. Volumes have been light likely because trading has been headline driven.

But by the end of this week and into next week, we could start seeing more conviction come into the market as earning season ramps up. 

Net interest margin

FIGURE 1: NET INTEREST MARGIN TICKING UP.

After falling for several years in the wake of the 2008-09 financial crisis, net interest margin, a key measure of bank profitability, has moved higher in recent quarters. Data source: Federal Reserve's FRED database. FRED® is a registered trademark of the Federal Reserve Bank of St. Louis. The Federal Reserve Bank of St. Louis does not sponsor or endorse and is not affiliated with TD Ameritrade. For illustrative purposes only.  Chart source: The thinkorswim® platform from TD Ameritrade.   

Nothing but Net: As the big banks prepare to report earnings this week and early next week, many analysts are likely to be eyeing net interest margin (NIM), a chief measure of a bank's profitability. In a nutshell, NIM is the difference between the interest income earned by banks—on mortgages, auto loans and so forth—and the interest paid out to depositors—such as checking and savings accounts, and certificates of deposit. In general, NIM is tied to interest rates. Higher long-term rates, and a steeper yield curve would generally be good for banks, and a flat or inverted yield curve would likely not be. As the Fed continues its march toward higher short-term rates, it's important to watch the back end of the yield curve.   

Volatility, Banks and You: An expansion of NIM isn’t the only expected driver for Q1 bank earnings, according to CFRA. The investment research firm said in a note that it expects higher loan growth and meeting expectations for more capital return from buybacks to also have contributed to bank earnings. It’s especially interesting to note that the research firm thinks higher volatility across asset classes has helped bank trading results. Here’s an example of how different market participants can view volatility, of which the market has seen a lot in recent days. Volatility can be a short-term trader’s best friend. They can stay on top of market moves within the day. But buy-and-hold investing by definition is a different strategy where long term investors can afford to ride out daily, weekly or even monthly gyrations of the market because they plan to hold shares for years.

Hawks Circling: According to Federal Open Market Committee minutes, released yesterday afternoon, policymakers expect a stronger economy and rising inflation, expressing optimism that could raise the chances of a fourth interest rate hike this year. Although almost all participants appear to want to stay with a gradual approach to raising the target range for the federal funds rate, some members also thought about shifting the Fed’s “accommodative” language to a “neutral or restraining” description of its economic policy stance, according to the minutes. The Fed now thinks GDP growth will hit 2.7% this year, up from a 2.5% forecast in December. Committee members expect tax changes and the recent federal budget agreement to provide an economic tailwind over the next few years. But a strong majority of policymakers viewed trade issues and uncertainties as downside risks for the economy.

Good Trading,
JJ
@TDAJJKinahan

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This week's economic calendar

THIS WEEK'S ECONOMIC CALENDAR

Source: Briefing.com

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