Good morning, some positive news coming for the USA.
After more than a year in the dealmaking doldrums, Wall Street giants are finally seeing signs of life in their capital-markets businesses. Leading banks, including Bank of America Corp., Morgan Stanley, JPMorgan Chase & Co., and Citigroup Inc., have surpassed analysts' expectations for equity-underwriting revenue in the second quarter. All but Citigroup reported earning more than they did a year earlier from that business. Additionally, the biggest banks, with the exception of Citigroup, have also exceeded estimates for debt underwriting.
Positive Outlook and Market Uplift
Morgan Stanley's Chief Financial Officer, Sharon Yeshaya, expressed optimism, stating that the signs are encouraging and it feels like things are getting better. The increasing backlog sets them up for a better 2024. This positive news, coupled with a surprise fixed-income trading gain at Bank of America and upbeat comments from Morgan Stanley executives, helped lift the shares of financial firms large and small. Notable names such as PNC Financial Services Group Inc., Bank of New York Mellon Corp., and Charles Schwab Corp., which also reported results on Tuesday, saw an upswing in their market values. As a result, the KBW Bank Index surged as much as 2.8% to its highest intraday level in three months.
Investment Banking Rebound Amid Challenges*
Investment-banking revenue has experienced significant fluctuations in recent years. During the pandemic, fees from underwriting and dealmaking soared, fuelled by low rates and government economic stimulus. However, they plummeted last year after the Federal Reserve began hiking interest rates to combat persistent inflation.
At Morgan Stanley, the increase in debt-underwriting revenue was primarily driven by higher investment-grade bond issuance, while the equity-underwriting increase was the result of more follow-on and convertible offerings.
Positive Developments Despite M&A Slowdown
Citigroup's Chief Executive Officer, Jane Fraser, also noted a similar phenomenon at her bank. "Globally, we're seeing less anxiety around funding, as most large corps are biting the bullet and paying higher rates to take advantage of issuance windows," she said. Similarly, Jefferies Financial Group Inc. management highlighted "green shoots" emerging in its investment-banking and capital-markets business.
However, Wall Street leaders remain cautious as mergers-and-acquisitions activity continues to lag. Advisory revenue at Bank of America, Morgan Stanley, JPMorgan, and Citigroup dropped 24% from the second quarter of 2022, with a 16% decline from a year earlier.
Market Adaptation and Outlook
To adjust to the changing landscape, most firms have been trimming their workforces, with Bank of America focusing on attrition rather than major job cuts. Morgan Stanley's results on Tuesday included $308 million in severance costs, primarily tied to its institutional-securities unit, which includes trading and investment banking.
JPMorgan CFO Jeremy Barnum expressed optimism about encouraging signs of activity in capital markets but acknowledged ongoing headwinds in M&A.
Goldman Sachs Group Inc. is scheduled to report its second-quarter earnings on Wednesday. Analysts expect the firm's equity-underwriting revenue to double from a year earlier, to $292 million, while debt underwriting may dip 2% to $446 million. Revenue from advising on M&A transactions is poised to slump 35%.
Morning Market Overview
Asia Market Update:
Equity markets in Asia experienced mixed performance, with benchmark indexes higher in Japan and Australia. However, shares in Hong Kong and mainland China declined, making them the worst performers in the region. Concerns about China's economic troubles weighed on risk sentiment, forcing a gauge of Asian shares to erase earlier gains. The offshore yuan also weakened to its lowest level in over a week.
China's Economic Troubles:
Investors are grappling with the challenges of China's economic slump, with fresh signs of financial stress among the nation's dollar-bond issuers emerging. Despite Beijing's plan to boost consumption, economists believe that additional measures are needed to meaningfully bolster the recovery. Market sentiment around Chinese equities remains pessimistic, with experts calling for more impactful policies to address the situation.
US Market Performance:
US stocks closed near session highs on Tuesday, with Bank of America Corp. and Morgan Stanley delivering strong results that bolstered bank shares and reignited a rally in equities linked to artificial intelligence. The S&P 500 and the tech-heavy Nasdaq 100 both rose for a second day, while the Dow Jones Industrial Average outperformed, marking its seventh consecutive day of gains, the longest winning streak in over two years.
Currency and Bond Market Highlights:
In the currency market, the yen weakened for a second day after Bank of Japan Governor Kazuo Ueda stated that the central bank would maintain its monetary easing stance unless there is a significant shift in its price goal view. Despite the yen's weakness, the BOJ is not expected to alter its monetary policy in the upcoming meeting. Experts anticipate Governor Ueda to focus on forward guidance and avoid major policy changes that could impact markets.
US data showed that industrial production and retail sales missed estimates, but an underlying measure of household spending pointed to a more resilient consumer. Inflation is falling, with the headline consumer price index (CPI) measure slowing to 3.0% in June from 4.0% in May. Some analysts believe that inflation might soon be tamed, leading to renewed bets on potential rate cuts by the end of 2023. However, central banks are closely monitoring underlying inflation, and the Federal Reserve is likely to continue its tightening path.
The yield on 10-year Treasuries declined, and European bonds gained after European Central Bank Governing Council member Klaas Knot hinted that monetary tightening beyond the upcoming meeting is not guaranteed. Markets are speculating about further rate increases, impacting the performance of global bond markets.
Oil Market Overview:
Oil prices edged lower after rising more than 2% in the previous session due to signs that Russia is following through with its pledge to curb supplies. Brent crude futures held steady at $79.64 a barrel, while West Texas Intermediate (WTI) crude traded near $76 a barrel. Slowing inflation and an improving economic picture in the US have led to a dialling back of interest rate hike bets, supporting the oil market.
Stay Informed and Empowered
As the financial industry experiences a rebound in certain segments, challenges persist, making it crucial for forex traders to stay informed and educated. At ChumpProfit.com, we are committed to providing you with the latest market updates, educational resources, and the opportunity to practice with demo accounts. As you embark on your forex trading journey, remember to stay vigilant, adapt to changing market conditions, and continue learning to achieve success in this exciting venture. Happy trading!
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