The first set of bank results released last Friday looked good, although the outlook remained dark and cloudy. Together, JP Morgan, Citi and Wells Fargo posted a Q3 profit – which soared by around 34% on the back of higher net interest income thanks to the Federal Reserve’s (Fed) meaningfully higher interest rates. The bank shares jumped after the results, but gains were given back on a morose economic outlook for the next quarters, uncertainties over clients’ capacity to pay back loans in the environment of rising interest rates and slowing economic growth, and the rising interest expense that rose by 275% at Wells Fargo, by 185% at Citi and by 170% at JP Morgan. JP’s CEO said ‘this is the world’s most dangerous time in decades.’
The earnings season will be at full speed this week with the rest of the US big banks due to report in the coming days, alongside Tesla – which saw its sales drop more than expected and its EV market share slip to a new low in the US in the Q3, Netflix – where the growth on no-more-password-sharing may have stopped, and TSM – which struggles with weak consumer demand and high inventories, but benefits from higher demand for more advanced chips.
But this earnings season will likely remain under the shadow of mounting geopolitical tensions in the Middle East and a broad-based discomfort and lack of appetite that comes along with it. Last week, the upside pressure in the US yields were contained despite a meaningfully higher inflation forecast from the IMF. The US 2-year yield remained close to the 5% level, while the 10-year yield retreated from the early-month peak as money flew into the safety of the US sovereign bonds on the back of rising tensions in Israel. Gold jumped more than 3% on Friday as investors flocked into the safe haven metal on expectation that Israel could start an offensive at Gaza anytime.
Purchases slowed this Monday as the weekend didn’t bring the worst possible outcome. But no one sees a viable solution nor a quick fix to ease tensions in Gaza. A potential Israel offensive could send gold to $2000 and above.
In energy, the barrel of US crude rallied 5% before the weekly closing bell. There is resistance into the $90pb psychological level; a potential implication of Iran in Gaza would bring a severe disruption to world’s oil supply in the medium run. Iran doesn’t want tensions to rise but they say that they can’t sit and watch if Israel enters Gaza. Here, as well, technicals will have little say if fundamentals dictate a further rally. Yet, unlike gold, price swings in crude oil have important implications for the world economy: rising energy prices threaten to disrupt the central banks’ war against inflation, and weigh on an already-bad-looking global economy. Therefore, a move above $90pb is possible, but a sustainable move above $100pb seems challenging.
The S&P 500 fell Friday, and posted a meagre 0.4% gain for the week, while Nasdaq fell 0.2% last week as investors preferred safety.
Investors will keep an eye on the latest updates for US retail sales, Canadian and British inflation data, and many Fed speakers will be telling their humble opinion – before the quiet period starts – on where the Fed policy should go amid the rising energy prices that threaten to fuel inflation, but also the rising long-term yields that do the dirty job of tightening the financial conditions instead of the Fed.
Finally, China will relevel its latest economic forecasts – where the GDP is expected to have slowed from 6.3% to 4.4% on a yearly basis. The consensus of analyst expectations points to no rate cut from the People’s Bank of China (PBoC) this week, but soft economic data, combined with last week’s flat to weak inflation numbers could bring a surprise cut before this week ends. Whether it would help ramp up the Chinese economy is yet to be seen. News of further Chinese stimulus did little to boost appetite in Chinese equities last week. The fact that China has shown support to Palestinians won’t help easing tensions with the US.
