For the last two days, we have seen unusual volatility in US banking stocks. On Thursday, the FDIC rolled back the Volcker Rule restrictions on big banks. Which simply meant the big banks can go back to playing monopoly again. They can take bigger risks and be creative with instruments like CDS (credit default swaps). We all know how that ended up during the GFC. That announcement gave banking stocks a big boost as we all know how much money the banks can make during this zero-interest rate environment.
But yesterday, the Fed got a little worried about the banks. In a 4 to 1 vote the Fed suspended future stock buybacks and tied bank dividend payouts to a complicated formula. Those interested can google up to understand more about it. But why is the Fed doing all this? After this week’s stress test on major banks, the Fed is overly concerned and is being protective, as there is no clarity on how long the pandemic can go on.
In a nutshell, the FDIC and the Fed wants banks to take more risks to boost the economy. But they also put brakes on share buybacks and higher dividend payouts. This was something they should have done long time back. Remember Dick Fuld who earned over $500 million in salaries and bonuses without taking any responsibility for bringing Lehman Brothers down. Leading banking stocks fell hard yesterday and while Jamie Dimon was busy “taking a knee”. JPM stocks fell 5%.
Meanwhile Microsoft will close all its physical stores. Think it is a sensible move. It doesn’t have any product that one needs to stand in line to buy nor it does have a cult following like Apple for its products. The pandemic really helped them to understand they could very well sell their products better online than through a physical store. They will take a charge of $450 million in fourth quarter due to the closures of 116 stores but think it will pay off very soon.
Issues surrounding the pandemic are getting very political as COVID cases hit all time daily records in US. One of the biggest talking points out of this will be “mail-in voting”. If it happens the Republicans can forget about the elections. It will directly benefit the Democratic Party in a big way. Without any of this President Trump is shooting himself in his foot. Let’s analyse the markets.
Equities
For some time, we have been building up a story giving ample evidence for a topping pattern in the major indexes. We had three up days last week as to two down days for the week, but the Dow closed at its lowest level for the month.
We believe the corrective tops were seen on June 8th at 27,580 in the Dow and 3233 for the S&P 500. Yesterday’s move down was more telling as there were 4.75 stock down on the big board for everyone stock that was up. The down volume was 87% of the total volume. Monday could turn out be a sharp down day.
Bonds
There was clear rotation out of stocks into bonds yesterday. The patterns now argue for a move to 183^02 of Apr 22 or slightly higher before it tops out for the next leg of its down move.
Euro
The Euro could have ended a corrective up move to 1.1349 on June 23. It is particularly important that it stays below this high for its move down to the 1.1000 area.
Gold
As long as prices stay above 1747, gold can rise to 1800. A break below the 1747 should conclude that a top has been seen. So next week’s trading should be very crucial for gold.
Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.
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