Friday, July 3, 2020

U.S. markets chart downward trend despite U.S. financial regulators’ policy statements

U.S. Markets continued their downward path Friday despite two key policy statements from the nation’s financial regulators. The Federal Reserve had released its stress test and sensitivity analyses just a day earlier.  Its assessment yielded positive views regarding the U.S. Banking Sector’s ability to weather the coronavirus pandemic’s economic shocks.  Three scenarios informed the monetary policy body’s announcement.  These involved a V-shaped recession and recovery; a slower, U-shaped recession and recovery; and a W-shaped, double-dip recession.  The news came just three months after the Fed slashed interest rates to zero.  Concurrently with the drop, it launched a $700 billion quantitative easing program to protect the economy from expected coronavirus outbreak shocks.

…the results of our sensitivity analyses show that our banks can remain strong in the face of even the harshest shocks

Randal K. Quarles, Vice Chair, Federal Reserve Board

Coinciding with the Fed’s assessment is U.S. financial regulators’ amendment of Dodd-Franck Act’s Section 619, commonly known as the Volcker Rule. The move eases provisions regarding proprietary trading or hedge fund investments for banking entities in support of capital formation.  With banks now able to reduce derivatives trade margin requirements and invest in private equity funds, billions of dollars in capital should become available.  Volcker Rule’s alteration, instituted after the 2007-2008 financial crisis, could prove disastrous, however, if banks again breach fiduciary relationships.

Read Also: Mastercard continues diversification with billion-dollar fintech investment

Nonetheless, markets worldwide reacted negatively at week’s end following both news:

U.S. Markets Continue Downward Trend

The Standard and Poor 500 index (SPX, -2.42%) dropped 74.71 points to 3,009.05.  The Dow Jones Industrial Average (DJIA-2.84%) also lost 730.05 points stopping at 25,015.55.  Similarly, the Nasdaq Composite Index (COMP, -2.59%?) fell by 259.78 points to 9,757.22.

S&P 500 relative to Dow Jones and Nasdaq on June 26, 2020 | Image: Wall Street Journal

Surprise Drops in U.S. Banking Sector

Unexpectedly, banking sector stocks declined significantly with the PHLX/KBW Bank Index (BKX-6.44%) sliding 4.96 points to 71.97 despite showing some gains after the announcement.  None of the major banks fared well individually: Goldman Sachs Group (GS-8.65%?), Bank of America (BAC-6.35%), and JPMorgan Chase (JPM-5.48%).

Bank Index relative to Goldman Sachs Group, Bank of America, and JPMorgan Chase | Image: Wall Street Journal

Downward Trend in Commodity Markets

Key commodity markets charted a generally downward trend Friday after the Fed’s announcement.  For instance, U.S. Crude (CLQ20-1.45%) decreased 0.56 cents to $38.16 per barrel.  Similarly, Brent Crude (BRNQ20-0.71%) fell to $40.64 per barrel registering a loss of 29 cents.  Both futures are steadily recovering after oil prices plunged to negative values back in April following worldwide coronavirus lockdowns.  Meanwhile, the WSJ Dollar Index (BUXX, 0.23%) showed relatively modest gains against the 16 foreign currencies in the index.  It rose to 91.83 compared to 91.62 on Thursday.

U.S. Crude and Brent Crude Oil Charts for June 26, 2020 | Image: Wall Street Journal

Asian Markets Show Gains

In contrast, Asian markets are going up following the U.S. financial regulators’ announcement.  For example, the Nikkei 225 Index (NIK1.13%) in Tokyo rose 252.29 points to 22,512.08.  Seoul’s Kospi Composite Index (SEU1.05%) gained 22.28 points reaching 2,134.65.  The FTSE Straits Times Index (STI, 0.55%) in Singapore rose 14.36 points to 2,604.51.  Jakarta’s JSX Composite Index (JAKIDX, 0.15%) reached 4,904.09 gaining 7.36 points.  In Australia, the S&P/ASX 200 Benchmark Index (XJO1.49%) added 86.4 points reaching 5,904.1.  The S&P/NZX 50 Gross Index (NZ50GR0.04%) in New Zealand also rose to 11,129.23 after gaining 4.87 points.  Hong Kong’s Hang Seng Index (HSI-0.93%), on the other hand, lost 231.59 points capping at 24,549.99.

Asian Markets relative to each other for June 26, 2020 | Image: Wall Street Journal

End of 2020 Economic Outlook

Also noteworthy is the U.S. Department of Commerce’s report of the U.S. economy’s shrinkage by 5% for the first quarter of 2020.  Forecasts for the second quarter ending next week should show significantly worst results given the economic downturn brought about by the pandemic.  Business closures, record-high unemployment claims, and lingering economic uncertainty over the last few months will all factor into these outcomes.

With second COVID-19 waves spreading in some countries and first-wave outbreaks not yet over in others, the economic slump has a long way to go

Prakash Sakpal, Senior Economist, Asia at ING Bank

Recent resurgence of high infection rates could also fuel further doubt regarding a prompt U.S. economic recovery for 2020’s remaining two quarters.  As inferred by ING’s Prakash Sakpal, investors may be on the lookout for more positive policy and health indicators.  This would require decreased hospitalization and infection rates as well as solid reassurance of states’ ability to reopen countrywide.

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