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Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
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Head of Fixed Income Strategy
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Major US banks slide despite record JPMorgan Chase result
Peter Garnry
Chief Investment Strategist
Summary: Equities are trading lower today on a mix of disappointment over Biden's stimulus plan and increased Covid-19 restriction across many countries. The negative sentiment has also impacted US banks despite strong results from JPMorgan Chase and a positive outlook. Earnings from Citigroup and Wells Fargo were a disappointment, but despite of today's reaction we maintain our positive view on US banks based on our reflation theme for 2021.
US equities are lower today driven weak sentiment into the weekend on more Covid-19 restrictions in several countries and slow pace of vaccination across the world. The big Biden $1.9trn stimulus plan should have been a major boost to the equity market but instead consensus has arrived at the point that it will end up much smaller in size. While this first stimulus plan for the new administration might end up being smaller the stimulus is not over as the slowdown in the US economy warrants more fiscal impulse which the US Congress will realize over the coming months. In other words, a lot of selling today is most likely risk reduction into the weekend and technically driven instead of a logical discount of the future which holds more stimulus until the economy is out of the woods. So today the reflation trade is not doing well.
Today is also the first major Q4 earnings release day with four major US banks reporting earnings. JPMorgan Chase delivered record quarterly net income of $11.9bn (47% y/y increase) up significantly from $2.59bn in Q1 driven steadily by releasing loan loss reserves as the global fiscal stimulus has avoided the worst-case scenario for banks on their loan portfolio. JPMorgan Chase is also lifting its 2021 guidance on net interest income by around 2% in a sign of a more upbeat outlook for the economy and the yield curve. Despite the positive result JPMorgan Chase shares were pulled down by the overall market trading 2.5% lower in early trading.
Citigroup could not live up to the stellar result of JPMorgan with FICC (fixed-income, currencies, and commodities) trading unit missing estimates and EPS down 18% y/y that nevertheless still beat estimates. Shares are down 4% in early trading. Wells Fargo was the other major US bank that reported earnings today and here investors are disappointed sending the shares down 7% despite beating on EPS. However, net revenue disappointed and has generally a less rosy outlook compared to JPMorgan Chase with a slow start to 2021 according to the CEO. Wells Fargo is rumoured to be considering selling its asset management business as Wells Fargo has struggled for years to make a strong business in the investment management and capital markets industries. Despite today’s setback for US banks we maintain our positive outlook based on our reflation theme for 2021.
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