Market Overview

U.S. major banks earning reports that were released on Tuesday came out better than expected. Despite warnings that the worst for the banking sector is yet to come positive financial results helped markets to resume climbing with a sigh of relief.

JPMorgan Chase (JPM) was the first among major U.S. banks to release its second-quarter financial results this earnings season. The largest bank in the United States and the sixth largest bank in the world by total assets, according to the S&P Global Ratings, with total assets under management of $2.5 trillion and overall clients’ assets of $3.4 trillion, saw the revenue at $33.82 billion or up 17% from the previous year. That is more than ten % above expectations, meaning it is the best revenue indicator value since Q2 2017.

For the quarter period ending June 30, 2020, JP Morgan's net liquidity inflows of $95 billion, including long-term products, were up 15% vs Q1 and 12% year on year. Deposits were up 20% year on year due to the growth in interest-bearing products, and loans were up 12% with a rise both in wholesale and mortgage lending. At the same time, its net profit dropped by 51% in the second quarter to $4.69 billion or $1.38 per share from $9.56 billion in the second quarter of 2019 as the bank management had to set aside $10.47 billion of provisions to cover potential losses on loans to borrowers hurt by the coronavirus pandemic. However, potential damage from bad loans appears to be less than the average market expectations assumed before, and it was significantly offset by a surge in revenue and also by bond and equity trading operations.

The JPM performance in the markets division rose 77% from a year earlier, and investment banking revenue also grew 46%, allowing the corporate and investment bank as a whole to post a 33% rise in revenue and $5.46 billion of profit. This effect prompted the JPM stock to rise 4.3% immediately in its initial response in premarket trading, even before the New York stock exchange (NYSE) opening on Tuesday. Later, JPM share prices fell almost to the previous levels, but it still remained at $98.21 per share after closing. The stock finished $0.56 higher than Monday's close, and $7.41 per share higher than the last week's $90.80 important local bottom.

At the same time, JP Morgan shares are still very cheap and far from its January highs near $140 per share, as well as from the peak of $115.77, where this asset briefly soared in early June on the first wave of expectations for a fast re-opening of the global economy. “Despite some recent positive macroeconomic data and significant, decisive government action, we still face much uncertainty regarding the future path of the economy," JMP CEO Jamie Dimon said in a statement. "However, we are prepared for all eventualities as our fortress balance sheet allows us to remain a port in the storm," he added.

Markets hope that the JPM financial pattern will be a typical scenario for the entire U.S. banking segment, as almost the same tendency was evident in the results of Citigroup, which also reported on Tuesday morning that earnings per share fell by 74% to $0.50, but that was better than $0.36 which was widely expected. So, the result was not so ugly just as the bank's bond-trading desk made a 68% rise in revenue on the year, as most of the clients were seeking safety and preferred to buy and hold fixed-income assets. However, Citigroup's $19.77 billion in revenue is still lower than its $20.73 billion in the first quarter of 2020, although higher than all the quarterly figures for the previous couple of years. As a result, Citigroup shares are still unable to break away from the $50 milestone, and may even have a temporary downward bias.

California-based Wells Fargo dropped 4.57% after yesterday's Q2 report, as the same "safety net" provided by its markets and investment division was missing in Wells Fargo's performance. They got a net loss of $2.4 billion after building $8.4 billion in provisions against bad loans. The bank also wrote off another $1.1 billion, bringing the total charge to $9.6 billion. Wells Fargo said it would have to cut its dividend by some 80% to only $0.10 a share, as the Federal Reserve moved to tighten bank pay-outs to ensure their balance sheets stay strong enough to withstand an expected wave of personal and corporate insolvencies.

However, the bank segment exceeded expectations overall, and it provided an encouraging impulse to the rest of the market too. So, Wall Street ended a strong Tuesday with a rebound in some temporary low-priced high tech shares. The U.S. S&P 500 broad market index gained 1.34%, and the Dow Jones Industrial Average (DJIA) added 2.13%, while the high tech Nasdaq 100 rose only by 0.94%. These were the final results of the day, which almost completely compensated for the negative impression from Monday's sharp downward correction.

Energy stocks became another big gainer on the day, as oil prices managed to avoid decline despite ongoing concerns about further growth of crude demand. 

Nevertheless, more companies will report before Friday and next week, as the Q2 reporting season has just started. Many market participants are ready to investigate under the microscope how the actual losses of the banks and companies would relate to expectations.

The virus cases in California, where the restriction orders to shut down almost all indoor activity were issued again this week, continued to rise, though there was also some subtle reason for limited optimism as the number of new cases there rose by 7,346 before the market's close compared with an 8,350 increase a day earlier. Still, California case numbers have unfortunately increased more and they have reached 9,561 by the end of the day. Yet, during Wednesday’s early morning hours  and during the European session before midday, markets took these worse numbers quite calmly. And, perhaps, for the following reason. The U.S. biotech Moderna declared its experimental Covid-19 vaccine showed itself as safe and effective by generating “robust” immune responses in all 45 volunteers taking part in the study. This became known from the human trial results published in the New England Journal of Medicine on Tuesday. The vaccine was injected twice on days 1 and 29, and 45 to enrolled participants who received their first vaccination between March 16 and April 14, 2020. Some antibodies were produced after one dose of the vaccine, but a second dose was required four weeks later, after which the vaccine candidates reportedly elicited a strong immune response in all 45 volunteers aged 18 to 55. Local adverse effects, when present, were nearly all mild or moderate, including fatigue, chills, headaches, myalgia, and pain felt where the vaccine had been injected. It is expected that on July 27, Moderna will launch a much larger research trial of the third stage, which could involve 30 thousand participants in 87 locations.

This information about a likely imminent appearance of the vaccine, of course, has also apparently significantly helped the markets to recover. Following this tendency, the safe-haven U.S. Dollar fell moderately against the common basket of major currencies. The Aussie soared well above $0.70, while the EUR/USD reached the 1.1445 mark, which is the highest level since March. The Greenback also fell below the 7.00 essential support level against the Chinese yuan, as CNBC reports that the Chinese Yuan may be set to see a sizable appreciation over the next 12 months, according to Zach Pandl, co-head of global foreign exchange and emerging market strategy department at Goldman Sachs. Mr Pandl forecasts that the Chinese currency could even hit 6.70 per Dollar “primarily through the health of the Chinese economy.”

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