US Q3 Earnings Season and Banking Challenges

Profit Margin Concerns

• Banks have raised deposit costs, leading to a 1.78% rise in the cost of deposits in the second quarter.

• Depositors have shifted to high-yield investments like Treasuries and money markets, potentially impacting banks' interest income and profit margins in Q3.

Loan Growth Slowdown

• Signs of slowing loan growth due to high-interest rates and weakened consumer confidence.

• Card loans continue to grow, but home lending activities are slowing down, affecting overall profitability.

Increasing Loan Provisions

• Expectation of increased loan provisions among the six largest US banks to cover potential credit defaults, with estimates reaching $7.7 billion in Q3.

Investment Banking Resurgence

• US bank mergers and acquisitions (M&A) activity rebounding after a five-year low in 2022.

• Recent IPO activity may boost investment banks like Morgan Stanley and Goldman Sachs compared to major banks relying more on lending activities.

 

Federal Reserve and Market Trends

FOMC Cautious Approach

• The Federal Open Market Committee (FOMC) indicated a cautious approach to its current path, recognizing more balanced risks and the need for careful decision-making.

Stocks and Inflation

• Stock markets responded positively to the FOMC's approach, with investors anticipating a decrease in the Consumer Price Index (CPI) to 0.3% month-on-month.

Interest Rates

• Raphael Bostic suggests that further action on interest rates may not be necessary as long as inflation continues to decline.

 

Political and Geopolitical Developments

House Speaker Nomination

• House Republicans have nominated Steve Scalise for the position of House speaker, with uncertainty regarding securing the necessary votes.

Israel-Hamas Conflict

• The ongoing Israel-Hamas conflict with a death toll surpassing 2,200, and considerations of new sanctions against Iran.

 

Market Reactions and Risks

Market Response to Gaza Conflict

• Analysis of market response to the Gaza conflict, which has raised concerns about potential scenarios leading to a larger crisis.

• Observations on how geopolitical events typically lead to a rush to safe havens like gold and US Treasury bonds, but the response has not been as significant as expected.

• Stock prices, including the S&P 500, have risen by more than 2% in the days following the news, with other trends remaining stable.

• Discussion on potential oil price spikes if the conflict spreads beyond Gaza and Southern Lebanon, especially if Iran becomes directly involved.

• Highlighting the need for the market to be more prepared for the worst possible outcomes and suggesting investment options such as defense and energy stocks, oil, precious metals, and even Treasuries as safeguards against escalation.

Bitcoin Resilience

• Observations on Bitcoin's relative stability despite challenges, including the trial of FTX co-founder Sam Bankman-Fried and potential impact on the crypto space.

• Factors contributing to Bitcoin's resilience, including the macroeconomic climate, rate expectations, and its role as a safe-haven asset.

 

Global Economic and Market Updates

KPMG Fined for Carillion Failures

• KPMG fined £21 million for its failures related to the collapse of construction firm Carillion.

UK GDP Growth and Challenges

• The UK economy grew by 0.2% in August, driven by the services sector, but there were contractions in the production and construction sectors.

• Concerns about high-interest rates impacting the UK's economic growth and the possibility of a recession.

• Pressure on the Bank of England to balance inflation versus growth.

ExxonMobil's Acquisition

• ExxonMobil's $60 billion deal to acquire Pioneer Natural Resources, doubling its footprint in the Permian Basin.

 

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Works cited: 2023/10/11 Bloomberg Close. 2023/10/12 Bloomberg, Authers, J. Op-Ed. 2023/10/12 The Guardian. 2023/10/12 Bloomberg Open and Takeaways, CNN Business, CNBC Morning Squawk.