FXCM's banks basket includes JPM.us, BAC.us, WFC.us, C.us, and Capital One Financial Corp. Each has a 20% weighting in the US.BANKS instrument. The top chart shows that the basket has charted a series of lower peaks (LP) followed by lower troughs (LT) on the weekly time frame. The price pattern puts the US.BANKS chart in a defined downtrend.
The middle chart shows the relative strength of the US.BANKS against FXCM's SPX500 CFD. Again a lower peak (LP) followed by a lower trough (LT) is apparent. This trend indicates that banks have been underperforming the broader market.
The bottom chart shows the yield curve derived from the US 10-yr Treasury and its 3-month note. From the high in May, the yield curve has charted a lower peak followed by a lower trough. I.e., this yield curve has flattened considerably from a spread of 2.3% to just a current 0.74%.
Banks look to borrow at the short-end of the curve and want to make their loans at higher rates. Given that the spread is narrowing, their profit incentive is declining, which implies stricter conditions for loans and headwinds to margins.
They are due to kick off earnings season this week. JPMorgan Chase, Morgan Stanley, and First Republic Bank are due on Thursday. Wells Fargo, BlackRock, Citigroup, US Bancorp, BNY Mellon and PNC Bank will follow on Friday. Given that spreads started narrowing in May, it will be interesting to see how earnings fair. However, their forward guidance will be more critical, given that spreads are thinning. So their expectations will be informative - especially in this macro environment.
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.