New highs for S&P 500 and Dow Jones
Banking stocks fail to join the party after updates from JPM, Citi and Wells Fargo
Inflation and retail sales numbers come in below expectations while consumer sentiment dips
The Dow Jones average and S&P 500 powered to new highs, while the Nasdaq Composite logged its second highest closing level.
The Dow Jones closed at 21,638, up 85 points, while the Nasdaq rose 38 to 6,312. The market benchmark, the S&P 500, advanced 11 to 2,459.
At the same time, the CBOE Volatility Index - known as the VIX, or more colloquially, the “fear tracker”, closed at the third lowest level since its inception in 1993, suggesting that all is well in the equities garden.
Gains were seen across the board among blue-chips, except financials, where the start of banking results season engendered some cause for concern.
JP Morgan Chase & Co, which released second quarter results before the bell, and Goldman Sachs Group Inc (NYSE:GS) were the two worst performers among Dow Jones constituents.
The former shed 0.9% and the latter 0.8%.
“Earnings season got off to great start for US banks, with the likes of Citigroup, Wells Fargo and JP Morgan all releasing impressive figures for Q2; however, the breakdown proved of great interest, with a strong consumer sentiment … helping drive profits, erasing the losses seen in their trading revenues,” noted Joshua Mahony at spread betting firm IG.
“The lack of volatility seen of late means we are likely to see the investment banks underperform vs those with a consumer focus to their business. Thus while we have seen Wells Fargo, JP Morgan and Citigroup outperform today, we have seen a sharp sell-off for investment banks such as Goldman Sachs,” Mahony said.
On the macroeconomic front, inflation and retail sales numbers both came in below expectations.
US headline CPI inflation dropped to 1.6% y/y (1.7% exp) from 1.9% in May, with energy and shelter prices providing less of a boost (2/2) pic.twitter.com/LhJlk2vyJr
— IIF (@IIF) 15 July 2017
The annual inflation rate slowed for the fourth month in a row in June, which was interpreted by many as a sign that the Federal Reserve is now even less likely to hike interest rates in September.
Retail sales slowed in June while the University of Michigan’s consumer sentiment gauge stepped back, suggesting that while equities investors may be sanguine about stock markets (viz the VIX), shoppers may be a little wary of future economic policy.
In Canada, the S&P/TSX Composite climbed 40 points to 15,1275.
Mid-session
Despite banking stocks getting the cold shoulder, the Dow Jones broke new ground in the morning session, after closing at a record level on Thursday.
The Dow was up 70 at 21,623 in lunchtime trading.
The broader-based S&P 500 was 9 points to the good at 2,457.
In Canada, the S&P/TSX Composite index was up 32 at 15,167.
On Nasdaq, Fifth Street was the place to be.
Fifth Street Finance Corp (NASDAQ:FSC) jumped 14% to US$5.33 after it emerged that Oaktree Capital Group will take over management of the business development company.
Oaktree is taking over the management contracts of Fifth Street Finance and also Fifth Street Senior Floating Rate Corp (NASDAQ:FSFR) - up 9% at US$8.70.
Market makers marked down the stock of Trovagene Inc (NASDAQ:TROV) by 20% to US$1.13 after the molecular diagnostics specialist announced it has entered into a securities purchase agreement with certain accredited investors to purchase around US$7.1 million of its common stock in a registered direct offering.
The big banks remained in the cold after trading updates from JP Morgan, Citi and Wells Fargo this morning.
"JPMorgan got the bank season off to a stronger than expected start with its best ever quarterly net income of $1.82 per share. Its key outperformance was in lending, with higher borrowing across residential mortgages, business loans, credit cards, and auto loans. This indicates that it targeted loan market share whilst rivals struggled. JPM’s average core loan book rose 8% in Q2." noted Ken Odeluga at spread betting outfit City Index..
"Although JPM was chief beneficiary in mortgages in Q2, it wasn’t immune to underlying weakness. Its mortgage fees and loan servicing revenues fell 41% as borrowers continue to shy away from refinancing as rates rise. Mortgage and loan malaise is therefore turning out to be one of the biggest concerns for the largest US banks despite higher net margins.
"The underside of JPMorgan’s dominance of loan growth left it more exposed to rising risks in that segment. It reported a $252m rise in cash set aside for defaults in credit card lending, lifting ‘charge-offs’ above 3%, well above Q1 and Q2 2016 levels. Whilst JPMorgan’s quarterly provision for credit losses overall fell 14% year on year to $1.2bn, investors seem concerned that credit provisions may have to rise again. Its executives have been warning investors to prepare for credit card loss rates to go up," Odeluga opined.
"For Wells Fargo, which has negligible trading businesses compared to its rivals’, headwinds seem to be mostly on the mortgage front, trimming total revenues a smidgeon short of expectations to $22.17bn. The big US lender most reliant on residential and commercial property loans saw an 18.8% fall in mortgage income. It’s still the biggest US provider of commercial real estate loans but grew slower than the market, said its CFO," Odeluga continued.
Open
Stocks opened firmer despite banking stocks acting as a drag on the main benchmarks.
The Dow Jones average was up 35, or 0.2%, at 21,567 whole the broader-based S&P 500 climbed 9 to 2,452.
The gains were achieved despite JP Morgan Chase & Co, Citigroup Inc and Wells Fargo & Co all suffering falls despite beating market expectations with second quarter numbers.
READ Citigroup, JP Morgan & Chase and Wells Fargo deliver on second quarter results
Wells Fargo (NYSE:WFC) was down 2.4%, Citi (NYSE:C) declined 1% and JP Morgan (NYSE:JPM) fell 1.9%.
Jamie Dimon, boss of one of the big names of the banking sector that brought the global economy to its knees in the previous decade, had some harsh words to say about the US federal government during an earnings call.
“"Since the Great Recession, which is now 8 years old, we've been growing at 1.5 to 2 percent in spite of stupidity,” Dimon said.
Just to be clear, he was talking about political stupidity, not the stupidity of bankers putting the world’s financial health at risk in search of a fast buck.
“The American business sector is powerful and strong," he said.
“What I'm saying is that it would be much stronger growth if there were more intelligent decisions and less gridlock," he declared.
Jamie Dimon on regulatory burden: "It's almost an embarrassment being an American" telling others the "stupid shit" we deal with $JPM
— Zach Fox (@zachffox) July 14, 2017
In broker news, Snapchat owner Snap Inc (NYSE:SNAP) fell even further below its flotation price of US$17, easing 27 cents to US$15.42 after Cowen became the latest broker to downgrade the stock.
Cowen has switched to a “market perform” rating from “outperform”. Earlier this week, banking heavyweight Morgan Stanley downgraded the internet stock.
There were some decent numbers in the US industrial production report for June.
The index rose 0.4% from May’s level, which was slightly above the consensus forecast of a 0.3% increase.
May’s index level, initially estimated as being unchanged from April, was revised upwards 0.1%.
“Within the details of the report manufacturing rose 0.2% MoM [month-on-month], utilities output was flat while mining output rose 1.6%,” noted James Knightley, the chief international economist at Dutch finance house ING.
“Oil and gas well drilling was the strongest component, rising 6.8% MoM (and is up 108.2% in the past twelve months). This highlights how much more efficient US production has become - growing at such a strong rate despite relatively subdued energy prices. It also underlines the challenge for OPEC’s supply cut efforts to get the oil price higher,” Knightley noted..
On the other hand, US inflation and retail sales came in on the softer side of expectations, Knightley observed.
The economist reckons June’s consumer price index level, unchanged from Mays, will reinforce “the view in the market's mind that the Fed won't carry through with the four rate hikes they are currently forecasting before end 2018.”
“Retail sales were also poor, falling 0.2%MoM versus expectations of a 0.1% gain; however, we note that there was a two-tenths percentage point upward revision to May,” Knightley said.
“Within the CPI report we can see that energy was the main downward driver (-1.6%MoM) reflecting lower gasoline prices resulting from oil price falls. There was also a fourth consecutive monthly fall in apparel prices. Tobacco, transportation and recreation also fell,” he added.
US rate hike expectations fade as inflation and consumer spending fall - as it happenedhttps://t.co/e4PFGKsSEP
— ArtisanBizTraining (@An_Artisan_Item) July 14, 2017