JJ Kinahan is Senior Vice President, Head of Retail Expansion and Alternative Investment Products at Cboe Global Markets, Inc. (Cboe).
Key Takeaways:
- Tech stocks follow South Korea’s Kopsi’s decline
- Bank stocks are mixed after earnings
- Jet fuel prices affecting airline stocks but not travel demands
Bank and technology stocks pressured the markets but were a big yawn range-wise, with nothing too exciting or too boring happening in either direction.
Four of the nation’s largest banks – JPMorgan Chase, Goldman Sachs, Wells Fargo and Citigroup – reported mixed third-quarter earnings today to help paint a picture of a so-far resilient economy benefiting from stable consumer and corporate spending. That’s the good news.
The cautious news is that higher interest rates, which are beginning to strain the housing industry and mortgages, could put a dent on the economy going forward. JPMorgan Chief Executive Jamie Dimon warned that “large fiscal deficits, sticky inflation, elevated asset prices, rising interest rates and geopolitical conditions continue to shift under the surface.”
The banks’ results were mixed with Goldman Sachs beating Wall Street’s estimates on profit, revenue and equities trading, which climbed an eye-catching 72%. That looked to be a triple threat for JPMorgan, which reported a rare miss on sales and earnings that were hit by a $65 million loss on investment securities. Not surprisingly, JPMorgan projected a healthy rise in net interest income (NII) amid higher interest rates that will more than cover what they pay out on deposits and funding costs.
Wells Fargo’s profit beat the Street, but it missed on revenues and NNI. Citigroup topped Wall Street’s expectations on profit and revenue and also raised its full-year NII guidance.
Bank of America and Morgan Stanley will report on Wednesday, before the bell. Both stocks closed lower, off 1.4% and 1.8%, respectively. After the bell today, Bank of America got hit with a $1.21 billion penalty from the Treasury Department related to violating anti-money laundering and sanctions obligations, to which the bank admitted. Shares fell 2.4% on the news.
On the options side, it looks like there’s a 3% implied move in either direction for Bank of America with activity concentrated at 59 calls for buyers and 50 puts. Morgan Stanley is at a 3.5% implied move with four times as many puts in play at the 185 and 187 level, three times as many calls at 205.
When the dust settled, the Dow Jones Industrial Average bounced around positive terrain before closing lower by 0.35%. The Nadsaq Composite spent much of the trading day in the red, finishing lower by 0.15% while the S&P 500 Index hugged the flat line and stayed there to settle the session.
Tech stocks suffered after China advanced a proprietary chip structure that compelled South Korea’s Kospi benchmark to fall 5.5%. That spread to U.S. markets straight away, leaving Micron 3% lower at the close, while Western Digital gave back 1.6% and Sandisk slipped 0.3%.
There were winners, however, with Apple reaching a record high as it claws its way toward $5 trillion market capitalization. Meanwhile, Nvidia’s market cap sits at $5.51 trillion and closed another 1% higher. There was some unusual options activity on Nvidia’s 220.50 and 225 puts that expire tomorrow. That’s considered inexpensive in real money terms, considering the stock closed at $228.52.
Elsewhere, the escalating cost of jet fuel is triggering a selloff in the airline industry despite robust revenues. Last week Delta Air Lines’ cut its full-year earnings projections and Wall Street widely expects to hear more of the same next week when three other major carriers report.
Delta’s nick to its full-year profit projections is tied to the 62% vault in fuel to $4.1 billion in the third quarter, a roughly $1.6 billion year-over-year leap. That’s prompted analysts to pull down full-year earnings expectations and price targets for other carriers, leading to Tuesday’s stock breakdown.
Airlines have significantly upped ticket prices to cover much of those higher costs and it appears consumers are still paying them. While lamenting the higher fuel costs, Delta Chief Executive Ed Bastian said in an interview with the Wall Street Journal that advance bookings for the holidays show “no slowdown in sight,” noting how revenues are expected to rise in high double-digits. That’s good for any business, but doesn’t always cover the higher operating costs.
Besides more bank earnings, tomorrow’s Consumer Price Index (CPI) report will be a headline to watch. CPI is the “basket” metric that tracks the average prices of everyday costs, such as food, housing and medical care to determine the direction and how fast or slow they’re moving. Wall Street is projecting a 3.6% year-over-year increase, higher from 3.0% a year ago and from 3.4% in August, according to FactSet. Core CPI, which excludes prices for food and energy that tend to be less stable month-over-month, is expected to stand pat at 2.4% from August.
The CPI is among the measures the Federal Reserve considers when deciding the direction of interest rates and looks like it will be a key data point before the Federal Open Market Committee’s two-day meeting beginning Oct. 27.
Happy Trading!
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