Bank Shares Under Pressure, Big Tech Soothes a Bit

Fears and Mixed Sentiments

Beats for Microsoft and Alphabet shored up futures markets after a rocky session on Wall Street amid fresh fears over the banks as First Republic shares tumbled on gigantic outflows. The S&P 500 moved further away from the horizontal resistance around 4,150, shedding 1.58% to 4,071, edging back towards the 50-day at 4,033, whilst the Dow Jones fell 1% to 33,530. But decent numbers from MSFT and GOOG helped lift sentiment after-hours and sent futures higher overnight, with Asian looking mixed. Debt ceiling fears are building – something to watch for the broader sentiment on Wall Street. Yields are tracking a little lower with the USS 10yr at 3.40%. European stock markets took up the bearish baton from Wall Street and opened lower with the DAX and Stoxx 600 off by more than 1%, heading for biggest one-day drop in a month, with banks under pressure once more. Housebuilders led the gainers on the FTSE 100 but the broader market fell 0.6% in early trade, led by declines for CRH, ABF, Spirax-Sarco and Bunzl, the last of which reported revenues to rise marginally in 2023.

First Republic Struggles Amid Outflows

FRC - how long until it’s sold? It may be struggling to find a buyer – currently pursuing strategic options. Results Monday showed $100bn in outflows and shares sank 50% yesterday following the earning report and earnings call. One worry is the lack of transparency since the earnings call featured no analyst questions. The question I have is: why anyone would still have money there, either as a shareholder or depositor? Can’t see it lasting the week tbh. Remember when I said parking $30bn of big bank deposits was throwing good money after bad? Shares are ticking up ~3% in pre-mkt.

Big Tech Earnings Boost Mood

Big tech lifted the mood though with MSFT +9% in extended trading after beating on both the top and bottom lines. EPS hit $2.45 vs $2.23 expected, with net income up 9% to $18.3bn on revenues of $52.86bn vs $51.02 expected. Revenues rose 7% yoy, but were flat with last quarter. Slowing PC sales is not helping. Intelligent Cloud business segment growth beat at +16%, whilst growth at Azure and other cloud services rose +27%, down from +31% in the prior quarter. Productivity suite – Office and LinkedIn – revenues rose 11%. More spending on AI of course but the bar was so low – just about shrugged off expectations for a tougher slowdown, particularly in cloud.

Alphabet shares also rose after beating expectations with EPS of $1.17 vs. $1.07 forecast, whilst revenue rose 3% to $69.79bn from $68bn a year earlier. Ad revenues declined from last year but beat expectations. Both beat a low bar – growth is not what we’ve become used to. Lots of AI hype is helping to cover up pretty unspectacular numbers. Both mentioned AI dozens of times in the earnings calls. Still seeing YT losing eyeballs to TikTok – will Congress come to the rescue? Interesting to see what Meta reports later today regards ad revenues…more AI commentary to watch for.

European Market Updates

Back in Europe, Standard Chartered beat expectations, with statutory pre-tax profit at $1.8bn vs $1.4bn expected and underlying profits rising 25% to $1.7bn. An 18% rise in net interest income is to thank as total income rose 8% to $4.4bn, with return on tangible equity up 170bps yoy to 11.9%. Shares ticked lower.

GSK – sales ex Covid robust, shares –0.25% in early trade. Total sales declined 8% but were up 10% excluding Covid-related medicines.

Persimmon +4% with upbeat outlook despite completions cratering due to the mortgage market uncertainty. New home completions declined 42%, in large part due to the chaos of the mini-Budget last autumn spooking buyers. Management expect full year 2023 volumes to be toward the top end of the previously indicated range of 8,000 to 9,000 completions, whilst sales prices remain “firm”. The update is lifting housebuilders.

Elsewhere, Riksbank hikes by 50bps this morning to 3.5%, Aussie inflation cools to 7%, and markets are eyeing the BoJ meeting with a decision due Friday. Ueda hasn’t stopped talking all week and now tells Japan's parliament that "dealing with cost-push inflation is very difficult for central banks. On the one hand, you'd like to curb inflation. On the other hand, you don't want to tighten monetary policy knowing that cost-push inflation will cool the economy".

The New Poor-mal

Should we accept being poorer? I thought that was anathema to the entire history of capitalist ‘progress’ since the industrial revolution? But parents now do think their kids will be worse off than they are. Huw Pill, the chief economist at the Bank of England, thinks maybe we should just pipe down and stop complaining about the drain on living standards. “What we’re facing now is that reluctance to accept that yes we’re all worse off, we all have to take our share,” Pill said. "Somehow in the UK, someone needs to accept that they're worse off and stop trying to maintain their real spending power by bidding up prices.”

It was the same scthick as Governor Andrew Bailey pulled a few months back: ‘don't ask for a pay rise – you'll only make inflation worse’. Well that’s not how it works pal and you are treating people like idiots. Meanwhile Ben Broadbent, also of the MPC, says QE had nothing to do with inflation. These people are actually the ones making the decisions – they are unelected and unspeakably arrogant. Maybe focus on doing your job instead of spouting about workers’ demands for fair pay.

FTSE 100 – further losses as price action pulls back from the 7,900 resistance.