Article published at 4 p.m. CT
JJ Kinahan is Senior Vice President, Head of Retail Expansion and Alternative Investment Products at Cboe Global Markets, Inc. (Cboe).
Key Takeaways:
- Earnings season kicks off with banks on Tuesday
- Nasdaq falls hardest at the close
- Dow closes to the upside
A quick housekeeping note before I dive in: Today's Market Take has moved to an afternoon publication schedule, providing an analysis of the trading day and a look ahead at what to expect tomorrow.
Today is Columbus Day and not only is the bond market closed, but so are government offices, many businesses and most schools, leading to low volume that typically means a slow trading day.
The three major indices bounced around during the session, with the Dow Jones Industrial Average gaining 0.38% while the S&P 500 Index barely budged. The Nasdaq Composite gave back 0.44%, weighed down by a 3% pullback in Micron shares.
Inflation data is coming out this week with the September Consumer Price Index (CPI) on Wednesday and the Producer Price Index (PPI) on Thursday. But the financial headlines traders will mostly be watching are earnings.
The earnings season officially kicks off Tuesday when major banks begin opening their books and giving us a peek into the economic health of corporations and consumers. Their conference call remarks and forward guidance offer insight into what might be ahead depending on trends tied to credit quality, loan growth, delinquencies, corporate dealmaking and even the broader stock market.
Indeed, banks are involved in everybody’s business one way or another and because of that, the consensus coming from them, and the insights in their conference calls, tends to give a fairly accurate picture of economic health. Overall, Wall Street is expecting the money institutions to report solid results, but many of them are coming off really good second-quarter earnings and growth is expected to slow. That could challenge reactions: Just meeting expectations might be viewed as a negative.
While mergers and acquisitions (M&A) were relatively robust, initial public offerings (IPO) were not with some companies, such as OpenAI, opting to stay private until next year.
IPOs are a big money maker for banks because their equity underwriting fees typically range from 4% to 7%, with those over $1 billion at the lower rate. When you consider how large some IPOs are, those fees add up quickly. SpaceX, however, negotiated 0.75% fees with the five investment banks that helped put its $75 billion IPO together, paying out roughly $500 million, according to published reports. Other fees were collected for the over-allotment in the weeks after the IPO, part of what helped juice second-quarter earnings.
As a result, investment banking across the sector is expected to have slowed down considerably. Bank of America, for example, said its broader investment banking fees are tracking 14.3% to 23.8% lower to an estimated $1.6 billion to $1.8 billion in the third quarter, compared with the $2.1 billion it earned in the second quarter.
The third quarter also brought higher Treasury yields and an interest rate hike, both of which impact banks in a variety of ways. Higher yields initially help banks’ net interest income (NII) – a crucial industry metric that is the difference between what interest banks earn from lending activities such as mortgages and commercial loans and what the pay out on deposits and funding costs. Interest rate increases are great for new loans and securities, but hits banks with long-term fixed-income mortgage portfolios and tends to lighten loan demands.
Here’s what we’re seeing in implied moves for the banks reporting tomorrow: Goldman Sachs is sitting under a 4% move and we’ve seen some buying in the 900 calls; Wells Fargo’s implied volatility is about 3% in either direction with the 89 calls and the 80 puts getting the most action; Citigroup also is about 3% with the 137 calls trading at two times normal and the 125 puts trading twice the norm. JPMorgan Chase, which has beat Wall Street’s estimates in two of the last three quarters, also is seeing 3% implied volatility with much activity in the 350 calls. Traders are expected to focus mostly on JPMorgan’s NII results.
In other options trading, there’s unusual activity with Oracle’s 140 calls, right at the money with Nov 20 expiration, as well as Broadcom’s with a bullish 400 call for a Nov 20 expiration too. That’s a sign that traders are still playing both stocks to the upside even on a day when the Nasdaq is taking a hit.
Happy Trading!
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