FINSUM

FINSUM

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(New York)

The bond market saw ten-year yields move higher yesterday, up over 3% in fact. Despite the rise, stock markets eked out a small gain. Some would consider this a positive sign. However, Barron’s is arguing the opposite, contending that the lack of market breadth lately may indicate that a recession is on the way.


FINSUM: We favor market breadth as a good indicator of sentiment. When investors think things are good, all sectors tend to rise, when they feel bearish, those gains tend to be isolated. Notice how the Nasdaq has risen considerably this year while other markets are flat. This is a good indication of how investors are feeling.

(New York)

There is a lot of consternation in the market about the direction of equities. Some fear for returns as higher rates and the possibility of a recession become clearer. However, the world’s largest asset manager has just come forth with position that sticks with US equities. The best way to summarize BlackRock’s view is that it thinks “fears of peaking earnings are overdone”. The manager believes that worries over macro concerns have overshadowed very strong fundamental performance.


FINSUM: So the question is how much of the great earning performance was simply because of the tax cut, and how much came from an improvement in the underlying businesses. That is key to understand before predicting where the market is headed.

Tuesday, 15 May 2018 09:50

Yields and the Dollar are Jumping

(New York)

Despite the hopes of investors, yields moved higher yesterday, with ten-year Treasury yields now back above 3%. For a while the momentum higher had been stemmed, but yesterday saw yields move sharply upwards. The move got the Dollar back on track, but it left equities nervous about what may lay ahead. Some market watchers say the recent market moves are a preamble to a correction.


FINSUM: Markets (stock and bonds) are bouncing all around, essentially momentum-less. We think things are going to be this way until a strong narrative takes hold—either trade war and recession, or something that renews the bull market.

Tuesday, 15 May 2018 09:48

Bank Stocks Look Poised for Success

(New York)

Bank stocks have had somewhat of a rough time this year. Like the rest the of the market they have been subject to turbulence. However, Barron’s says that clear sailing might lay ahead, as the stocks are looking less risky and likely to have more gains. The reason why is that bank stocks have been showing less and less beta lately, meaning they are trading at less relative volatility to the market than previously. This will lower their cost of capital and keep things steadier as rates rise, which will be bullish for performance. According to one research analyst, “Higher rates will have a positive impact on earnings, loan growth appears to be picking up, and we expect further regulatory relief”.


FINSUM: Given that higher rates improve net interest margins for banks, and the fact that there is significant regulatory relief occurring, we are feeling optimistic.

(New York)

The Trump era of deregulation is really starting to play out for the financial services industry. On top of the collapse of the Volcker rule, banks might be about to enjoy a major concession from regulators: the assumption that short-term trades are automatically a violation of the rule. The Fed and other regulators are planning to drop the assumption that a position held by a bank for less than 60 days is a violation of the Volcker rule.


FINSUM: This would be a major development as banks would be left to comply with the rule on their own terms. That shifts the burden of proof onto regulators, who would now need to prove a trade was a violation.

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