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Good morning. I'm Amrith Ramkumar, getting you ready for Wednesday trading after stocks edged lower yesterday. Futures are up this morning. Lowe's and Target just released their latest quarterly figures, while retailers Nordstrom and L Brands are on deck after the closing bell. Investors will get a look at minutes from the Federal Reserve's latest meeting this afternoon with many anticipating more interest-rate cuts ahead. Plus, our Sam Goldfarb explains why bank bonds have been outpacing the corporate-bond market even as shares of lenders tumble. |
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| Bank Bonds Stay Steady Despite Growth Fears |
By Sam Goldfarb, bond market reporter |
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The relatively strong performance of bank bonds is sending an encouraging signal at a time when financial stocks are under pressure from recession fears. The KBW Nasdaq Bank index of large U.S. commercial lenders has slid 11% so far this month, as investors have registered concern about slowing economic growth and falling interest rates, which could put pressure on banks’ profit margins. The S&P 500, by comparison, has fallen 2.7%. Although the extra yield, or spread, that investors demand to hold bank bonds over U.S. Treasurys has also increased, it hasn’t climbed as much as those on bonds backed by industrial companies. In fact, the average spread on bank bonds recently fell to 84% of the spread on investment-grade industrial-sector bonds, the lowest level since February 2016, according to Bloomberg Barclays data. Investors and analysts say bank debt has retained its appeal due largely to postcrisis regulations that have forced banks to hold more loss-absorbing capital and strengthen their balance sheets. In stark contrast to where it stood during the last recession, the banking sector is now seen as among the least vulnerable to a crisis if the economy were to slow sharply. That makes investors confident that their bonds will be repaid at maturity. Adding to the demand for bank bonds this year: financial institutions have sold relatively few new bonds compared with previous years when they were under greater pressure to issue debt to meet certain regulatory requirements, investors and analysts say. Through Monday, financial institutions had issued $300 billion of bonds, down 21% from the year-earlier period, according to Dealogic. Even the negative impact of lower bank profits could ultimately be mitigated for debt investors, some analysts say. If the economy slows and long-term interest rates stay near historic lows, the Federal Reserve may be less inclined to allow banks to return a hefty share of their profits to shareholders in the form of dividends and stock buybacks when it makes its next judgment on that question in June of next year, said Jesse Rosenthal, head of U.S. financials at the research firm CreditSights. There is, in that way, “a kind of natural offset for creditors,” Mr. Rosenthal said. Major banks, so far, have continued to report healthy earnings. In the three months ended June 30, robust consumer business drove profits higher at JPMorgan Chase, Wells Fargo and Citigroup. What are your expectations for the banking sector moving forward? Let the author know your thoughts at sam.goldfarb@wsj.com. Emailed comments may be edited before publication in future newsletters, and please make sure to include your name and location. |
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The amount of extra yield, or spread, that investors demand to hold triple-C rated junk bonds has increased to around 8 percentage points over higher-rated double-B bonds, according to ICE BofAML data. That is the widest since November 2016 and shows debt investors are shying away from junk bonds with lower credit ratings. U.S. oil prices are trading at the smallest discount to global prices since July 2018, a reversal that some analysts expect to limit U.S. exports and cause a buildup of domestic crude. Options traders are forecasting a roughly 11% move in Nordstrom shares after the retailer reports earnings later today, above the average 6.7% over the past eight earnings releases, according to Trade Alert. They are betting on up to a 13.6% move in BJ’s Wholesale Club Holdings shares after the company reports results on Thursday. Historically, the stock has swung an average of 4.7%. Traders are wagering on bigger moves than historically recorded for Ross Stores, too. |
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U.S. existing-home sales for July are expected to rise to an annual pace of 5.39 million from 5.27 million a month earlier. The figures are out at 10 a.m. ET. U.S. crude-oil stockpiles for the week ended Aug. 16 are slated for 10:30 a.m. Inventories are expected to have fallen 1.5 million barrels, per the average target of 12 analysts and traders surveyed by the Journal. Stockpiles rose unexpectedly the previous two weeks. The Congressional Budget Office releases its 10-year budget forecast at 11 a.m. The new figures will include the latest two-year budget deal signed this month by President Trump. The Federal Reserve releases minutes from its July 30-31 meeting at 2 p.m. The Minneapolis Fed's Neel Kashkari moderates a panel on economic research at 6:30 p.m. |
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| There’s no doubting that tweets by President Trump, pictured in Manchester, N.H., Aug. 15, have the power to move markets, both up and down. PHOTO: PATRICK SEMANSKY/ASSOCIATED PRESS |
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Don’t bet on Trump rescuing the stock market. Should investors rely on Donald Trump underpinning the stock market by backing away from trade threats as stocks fall? In short: not as much as they seem to, James Mackintosh writes. Slowing buybacks have removed a pillar of the market. U.S. corporations are repurchasing their own shares at the slowest pace in 18 months, a potential sign of more volatility as the buyback bonanza from the corporate tax overhaul wanes. Goldman is pursuing a majority stake in its China venture. Goldman Sachs has applied with Chinese regulators to take a majority stake in an investment-banking joint venture, the most recent move by a foreign company to tap the nation’s vast financial sector. The mortgage market has reopened to risky borrowers. More than a decade after the financial crisis, home buyers with low credit scores or high debt levels as well as those lacking traditional employment are finding it easier to obtain credit. American Dream mall developers are putting up other mega malls as collateral. Triple Five Group, which owns the Mall of America in Minnesota and West Edmonton Mall in Canada, has pledged nearly half of these properties as collateral for a $1.67 billion construction loan for the long-delayed project in East Rutherford, N.J. Hess has been 2019’s top oil-and-gas stock. It has nothing to do with shale. Hess’s popularity with investors is rooted in its 30% stake in an immense offshore oil field in Guyana that appears poised to become one of the most lucrative megaprojects in years. Beijing tiptoed toward cheaper loans for capital-starved companies. China’s central bank set new reference lending rates lower in its latest push to cut borrowing costs for struggling small businesses, but economists say the move could be too small to counter the country’s economic slowdown. Banks will get some relief in Volcker-rule changes. Banks are on the verge of getting some relief from Volcker-rule limits on speculative trading, one of the industry’s priorities in amending the regulations put in place after the financial crisis. |
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| What We've Heard on the Street |
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“The German economy needs new sources of growth. Investors shouldn’t count on fiscal stimulus to be one of them, even if the government loosens the purse strings a bit.” | —Heard on the Street columnist Jon Sindreu |
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Toll Brothers: The home builder said sales and profit fell less than expected in the latest quarter from a year earlier and gave upbeat full-year targets for deliveries. Cree: The maker of lighting products gave downbeat revenue and earnings projections for the current quarter. Urban Outfitters: The retailer said profits fell less than Wall Street expected in the most recent quarter. La-Z-Boy: The furniture company posted an increase in quarterly sales from a year earlier and beat on earnings. |
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