What has happened
Yesterday took a decidedly risk off tone as a flurry of earnings and hard economic data reminded investors of the sharp contraction in economic activity that is occurring. Amongst the data US Retail sales was a focus with an 8.7% fall month-on-month for March, worse than expectations and around double the largest monthly fall during the financial crisis. The more positive news came from Angela Merkel as Germany announced that it would begin a gradual exit strategy from the 3rd of May. Schools and small shops will open on that date, but this will be the beginning of a series of lagged measures with bars and restaurants still remaining closed. This development came after European markets had closed so is helping support sentiment in today’s session.
What is happening to US Bank earnings?
As other major US banks report their earnings, we are seeing a series of themes emerging. Profit is universally lower across the whole bank but trading revenues are higher due to increased client activity in both equity and credit. There are also increased provisions for loan losses due to higher expected defaults from individuals and businesses due to the economic stress of coronavirus. The individual fate of banks is largely determined by their segment blend with those focusing on capital markets activity such as Goldman Sachs relatively benefitting whilst those with a retail & commercial loan focus have suffered.
What does Brooks Macdonald think
Yesterday’s weakness should be read in the context of the rally we have seen over the last three weeks. Economic data and corporate data was always going to be very poor and therefore the reaction to confirmations of this fact are more to do with the general mood of the market than the data itself. The best example of this is the initial jobless claims report which has been the blockbuster data set when it comes to the impact of the virus and one that is released today. We have seen over 16 million people file in the last three weeks, however on each of the days we have seen the release the US market has rallied by at least 2% with one day over 6%. As a result we firmly believe that the duration of the lockdowns are the primary focus of the market rather than data, be it corporate or economic. Days like yesterday will happen but new case growth and governmental progress towards exit strategies will dominate the medium-term trend for equities.