US Bank stocks getting clobbered - MARKET WRAP

Stocks ticked lower for a second day, led lower by bank stocks following poorly-received quarterly results and as hopes for a pre-election stimulus deal continue to fade.

 

MARKETS

Mnuchin dampens stimulus hopes, small caps suffer

Nothing dramatic is happening but markets are pricing out the chance of pre-election stimulus, reconciling it with the idea that post-election stimulus will be bigger. In the short term that has meant lower stocks and a stronger dollar but also a return of the underperformance of small cap stocks versus mega cap tech. Treasury Secretary Steve Mnuchin and House Speaker Nancy Pelosi have been doing a lot of talking but it doesn’t seem to be bridging the different views of the two parties.

Talks continue Thursday so hopes are being kept alive but Mnuchin said “getting something done before the election and executing on that would be difficult.” Realistically a deal seems unlikely before the election. Democrats don’t want President Trump getting credit for more stimulus and Republican Senators don’t want to be seen to sign off on massive government spending which is antithetical to what they are voted in for by conservative voters.

 

ASOS triples profits but future less bright

European stocks edged lower on Wednesday. A standout loser was ASOS where shares lost over 10% following the release of full-year results. Stunningly ASOS reported a tripling of quarterly profits – pretax profits rose 329% - gaining advantage from expanded online fashion shopping and the fallout of rival Boohoo. Investors were not happy with the company’s less optimistic guidance on future quarters. The company said “life for our 20-something customers is unlikely to return to normal for quite some time.” Clearly there is profit taking going on but the extent of the drop demonstrates a broader concern from investors that lockdown-winners have past their best.

 

European Summit (Brexit deadline)

UK Prime Minister Boris Johnson marked out today (Oct. 15) as the day when enough progress needed to have been made on UK/EU trade talks or the UK would walk away and prepare for a no deal exit. Clearly no deal is not the preferred outcome from a UK perspective and it looks like Johnson will allow his deadline to come and go with little fanfare.

Reports on Wednesday suggested the UK would look toward the start of November as a fresh deadline in which a deal should be in place. The October deadline was not random- it coincides with a scheduled EU summit, where agreement could have been quickly reached. It might still be that the gathering of leaders today will focus attention on Brexit priorities that will allow a deal to pass.

 

Bank earnings – BOA, Goldman Sachs, Wells Fargo

Lending-focused banks Bank of America and Wells Fargo missed expectations and their stocks dropped. Bank of America generated $20.45 billion in revenue, below the $20.8 billion expected while Wells missed on profits. Banks are central to the idea of a rotation into cyclical companies set to benefit when economies recover from the pandemic. The reaction to the Q3 bank results look like they aren’t enough to coax investors away from high-flying tech performers this year. Goldman Sachs shares also dipped although it topped estimates thanks to a boom in bond trading and asset management.

 

DAY AHEAD

European Council Summit: Brexit deadline

Australian unemployment

China CPI

Philly Fed manufacturing

Morgan Stanley Q3 earnings

Walgreens Boots Alliance Q3 earnings

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