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Market Analysis 13 July 2021

july13

With the largest U.S. banks reporting their second-quarter earnings this week as Q2 earnings season kicks off, investors don’t have much to complain about.

The KBW Bank Index is up more than 70% during the past year, double the gains delivered by the S&P 500 during the same period. This remarkable performance during one of the deepest recessions in U.S. history is a testament to their resilient business models, which were developed after the 2008 financial crisis.

This surprisingly robust performance, however, can’t go on forever with the pandemic-related earnings boost tapering off gradually as the economic reopening continues.

The big difference will be a substantial drop in the banks’ trading revenues, which are expected to show a 28% decline for the top U.S. investment banks according to analyst estimates when they begin reporting second quarter results starting today.

Citigroup (NYSE:C) and JPMorgan (NYSE:JPM) executives have warned ahead of their earnings that each of their trading revenues could be down 30% or more compared with a year ago. That could amount to a loss of about 10% of total revenue at each bank.

Loan growth, which has been weak during the pandemic as both consumers and businesses curbed their spending, has yet to pick up. Total loans for the commercial banks probably fell a combined 3% in the quarter, according to analysts’ estimates.

Favorable Economic Backdrop

Despite these weak spots, top banks still have areas of strength that could surprise investors this season. These lenders, for example, can release billions from the reserves they built during the pandemic to deal with the impact of soured loans.

Banks could report Q2-per-share profits that are 40% higher than the same period a year ago, according to analysts at Keefe, Bruyette & Woods, via a Wall Street Journal report. Another factor that could provide a boost to this week’s earnings is a record first half for mergers and acquisitions. Revenue from this business could see a 30% surge for the industry.

On a slightly longer horizon, the economic backdrop continues to be favorable for banks, in our view. Combined with the government’s massive infrastructure spending, and a gradual tapering off monetary stimulus, banks could see demand for credit pick up substantially next year as companies and individuals use up the liquidity accumulated during the pandemic.

Wells Fargo Weekly Chart.

Wells Fargo Weekly Chart.

Wells Fargo (NYSE:WFC) and Bank of America (NYSE:NYSE:BAC), which both reporting earnings Wednesday ahead of the open, are well-positioned to benefit from growth in loans and rising interest rates, two key themes likely to drive bank stocks over the next nine months.

Eighteen analysts who offered stock ratings for Wells Fargo in the last three months forecast the average price in 12 months of $49.29 with a high forecast of $60.00 and a low forecast of $43.00.

The average price target represents an 11.79% change from the last price of $44.09. From those 18 analysts, 11 rated “Buy”, seven rated “Hold” while none rated “Sell”, according to Tipranks.

Bank of America Weekly Chart.

Bank of America Weekly Chart.

Citi, on the other hand, which also reports on Wednesday before the bell, is a good bet to pay higher dividends going forward. It was the lone bank from the group of six top lenders last month that didn’t increase its dividend, keeping its quarterly payout unchanged at $0.51 for a 2.98% annual yield, but leaving the door open for a hike.

As with the other banks we’ve previewed, analysts are mostly bullish on the bank, with 17 of 26 rating the stock a Buy or Strong Buy and only two Sell/Strong Sell ratings. The median price target on the stock is $44.00, implying a potential upside of about 10% to a recent price of $40.35. At the high target of $52, the upside potential is about 30%.

C Weekly Chart.

C Weekly Chart.

Five of the six largest banks have already lifted their dividends, collectively raising their per-share payouts 40% from levels they held steady or cut during the coronavirus-induced economic collapse. They also committed to buying tens of billions of dollars of their own stock after the Federal Reserve affirmed they are healthy enough to do so.

Analysts remain bullish, with 17 of 25 rating Citigroup shares a Buy or Strong Buy and the others rating the stock at Hold. The median 12-month price target on the stock is $85, and at a recent price of around $68.50, the implied upside is 24%. At the high target of $114, upside potential rises to 66%.

The bank is expected to report EPS of $1.98 (up from $0.50 in the same quarter last year), but down from $3.62 in the first quarter of 2021. Revenue is forecast to come in at $17.3 billion, down from $19.33 billion in the prior quarter and $19.77 billion in the year-ago quarter. For the full fiscal year, Citi is expected to report revenue of $70.63 billion, a dip of nearly 5% year over year, and EPS of $8.92, an increase of $83%.

The stock trades at around 7.9 times expected 2021 EPS, 8.5times estimated 2022 EPS and 7.6 times estimated 2023 earnings. The stock’s 52-week range is $40.49 to $80.29, and the bank pays an annual dividend of $2.04 (yield of 3.0%).

Bottom Line

Earnings from some of the nation’s largest banks could show that the pandemic-fuelled bump in their sales is already over. That said, the second phase of their earnings growth has yet to come. That should occur when they begin to benefit from loan growth and higher interest rates.

FOREX: GBP/AUD

GBPAUD is approaching the upper brown trendline from Daily timeframe acting as a non-horizontal resistance we will be looking for sell setups on lower timeframes.

on M30: GBPAUD is forming a trendline in red but it is not valid yet, so we will be waiting for a third swing to form around it. (projection in purple)

Trigger => Waiting for that swing to form then sell after a momentum candle close below it. (gray area)

Until the sell is activated, GBPAUD would be overall bullish and can still trade higher. o

FOREX: EUR/USD

we need more confirmations for EURUSD before opening a valid positions. Hence, we are waiting for a classic breakout+retest of one of the boundaries of the small ranging box before going long or short on this one.

It is almost reaching the support zone, we wait for confirmation, in case the support breaks we would expect the price to continue falling.

General Market

the Dow Futures contract was down 55 points, or 0.2%, S&P 500 Futures traded largely flat, while Nasdaq 100 Futures gained 50 points, or 0.3%.

The major indices have soared to record levels in recent sessions, boosted by a successful vaccination program ensuring the country reopens while being underpinned by massive levels of both monetary and fiscal stimulus.

However, it’s debatable how much longer these factors will remain in place.

The U.S. recorded its highest daily total of new Covid cases since May over the weekend as the highly-transmissible delta variant works its way through the unvaccinated portion of the population.

Attention now turns to the release of the consumer price index for June, , which is expected to have risen by 4.9%, a small drop from May’s 5%. May’s number was heavily influenced by the rise in used car prices this spring, and by a base effect from last year’s energy markets that is now fading.

Rising inflation has been an important influence on Wall Street’s recent movements as investors fear an overheating economy could prompt the Federal Reserve to tighten its ultra-loose monetary policy sooner-than expected.

The Wall Street Journal reported Tuesday that St. Louis Federal Reserve President James Bullard, previously seen as something of a dove, now says the time is right to reduce the pace of central bank’s bond purchases.

In the corporate sector, the second-quarter earnings season starts in earnest with the release of numbers from banking giants JPMorgan and Goldman Sachs. Their quarterly updates are expected to be strong given the recent rise in bond yields as well as sustained equity market strength.

Additionally, PepsiCo raised its full-year earnings forecast on Tuesday, betting on increased demand for its drinks as the entertainment sector reopens, while Johnson & Johnson is also likely to be in focus amid concerns the drug maker’s Covid-19 vaccine was linked to an increased risk of a rare neurological disorder.

Elsewhere, oil prices pushed higher Tuesday after the International Energy Agency warned that energy markets will “tighten significantly” if the group of top producers, known as OPEC+, doesn’t come to an agreement over adding additional output.

The American Petroleum Institute is scheduled to release its U.S. crude oil supply data later in the session and inventories are expected to drop for an eighth consecutive week. They fell to the lowest since February 2020 in the week to July 2.

At 7:05 AM ET, U.S. crude futures traded 0.1% higher at $74.16 a barrel, while the Brent contract rose 0.2% to $75.31.

Additionally, gold futures rose 0.1% to $1,808.30/oz, while EUR/USD traded 0.1% lower at 1.1842.

Written by Editor

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