Banks Kick off Q3 Earnings Season with Their Stock Prices Underperforming the Broader Market

  • SPX500
    (${instrument.percentChange}%)

Introduction

JPMorgan Chase & Co. (JPM.us) is set to lead the charge as the third quarter earnings season for the banking sector commences on October 13th, right before the market's opening bell. Joining the ranks on the same day are Citigroup Inc. (C.us) and Wells Fargo & Co. (WFC.us), who will also unveil their financial results.

Bank of America Corp. (BAC.us) and Goldman Sachs Group Inc. (GS.us) will step into the earnings spotlight on October 17th. Not to be left behind, Morgan Stanley (MS.us), the final piece in the puzzle among the "big six" U.S. banks, will wrap up this earnings season with its financial announcement on October 18th.

FXCM US.BANKS Basket


There is little doubt that Wall Street is nervous about the sector, with market conditions challenging. FXCM's US.BANKS basket remains under pressure. Its green 5-week EMA is below its orange 10-week EMA, which is a bearish formation. Moreover, the weekly RSI remains subdued. It is below 50 (green rectangle), which suggests an underlying bearish momentum for the basket. The longer the RSI remains sub-50, the greater the headwinds that the sector faces on a technical basis.

Higher Interest Rates

A key driver for banks is the level of interest rates and over the third quarter we have seen bond yields rising rapidly. Whilst higher rates benefit the banks via their lending facilities, there has been some downsides too. The pace of increase means that banks' funding costs have also risen at a time when defaults on their loans are increasing. Moreover, and importantly, the higher yields also mean that the bonds that the banks are holding on their balance sheets have lost value, resulting in significant unrealised losses.

The "higher for longer" narrative is impacting bank stock prices negatively, with the sector unable to truly recover from the wipeout following the banking confidence crisis in March this year. In effect, FXCM's US.BANKs basket has considerably underperformed the broader SPX500 index since then:

Source: www.tradingview.com

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The chart above shows the US.BANKS basket divided by the SPX500 index and is called a relative strength chart. It is moving in a southeasterly direction (red arrow), denoting the underperformance of the US.BANKS basket relative to the SPX500 in this case.

Russell Shor

Senior Market Specialist

Russell Shor joined FXCM in October 2017 as a Senior Market Specialist. He is a certified FMVA® and has an Honours Degree in Economics from the University of South Africa. Russell is a full member of the Society of Technical Analysts in the United Kingdom. With over 20 years of financial markets experience, his analysis is of a high standard and quality.

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