The US banking sector had a bumpy ride recently, almost as rocky as the mountain of expectations surrounding the Trump trade.
Ben McLannahan of the Financial Times reviews this intriguing relationship from the inside, via the operations of some top banking executives.
See our propositions at the end of this post. We take a wider macro-financial stance by assessing some relationships between banks, the yield curve, public policies, the USD and the equity market.
Please consider ‘Wall St’s top bankers sell own groups’ shares as Trump rally reverses’ by the Financial Times:
“Wall Street analysts have been urging investors all year to buy stocks in the big US banks. But Wall Street itself is not listening. Executives and board members at the top six US banks have been consistent sellers of their own banks’ shares this year, according to an Financial Times analysis of disclosures tracked by Bloomberg.”
“Some observers said the sales could have been driven by disenchantment with the economic programme of Donald Trump, the US president, who rode to power partly on a promise of higher interest rates, lower taxes and lighter regulation. That rhetoric helped propel bank stocks sharply higher in the weeks after the election last November.But a series of setbacks on the policy front have since cast doubt on those objectives, bringing bank stocks back down. On Friday, the KBW Banks index — a grouping of two dozen of the biggest Wall Street and regional banks — was just 3 per cent higher so far this year. Bank stocks have become “a barometer” for the success or failure of the Trump administration’s policies, said Robert Smalley, credit analyst at UBS in New York.”
“David Hendler, founder and principal at Viola Risk Advisors, said recent share sales by executives at the big retail banks, in particular, could be smart, as some consumer portfolios are showing signs of strain. Credit cards delinquencies are rising, while car loans have been looking fragile for a while. “Credit risk is ricocheting back as a legitimate concern after years of hibernation,” he said, adding that investment banking divisions were doing little to take up the slack.”
So, US bank execs ponder insider credit strain as the Trump rally reverses.
Sounds familiar? Smart to ‘take some chips off the table’ ?
We suggest :
- McLannahan and Smalley are right: the Trump trade is passé and the post-election banking rally has been short lived.
- Credit quality has certainly to do with it.
- But banks did actually capture something else than the Trump trade itself.
- The relative performance of the banking sector tracks the evolution of the yield curve.
- Interestingly enough, from this perspective, monetary and fiscal policies somewhat neutralized as the yield curve merely blipped during this period.
- Our analysis suggests that economic expectations and surprises played a major role on the USD:
- After having been supportive in a first stage, the normalisation of the Trump trade led to a significant decline of the USD …
- … 1.1850 and 1.25 being respectively identified as potential peak and undershoot levels vs. the EUR.
As the correlation between currencies and US equities flip flopped, we believe that the weakness of the USD played an important role behind the recent strength of US equities.
If these relationships hold true, one should track the USD and the yield curve as powerful market drivers.
More to come.