Violent reversals; UK in the Hunt; Resilient bank customers; Banks and Interest Rates; "The Dow" ???? MoneyFitt Morning - Tuesday 18th Oct 2022

1??IN THE MARKETS

Monday's violent reversal (of Friday’s violent reversal of Thursday's violent reversal)

Stocks rallied sharply on Monday in a collective sigh of relief over the UK's plans to scrap a controversial tax cut plan that caused chaos in financial markets in the last month. While the UK's benchmark FTSE-100 only rose 0.9%, the Pound Sterling rose to its highest level in two weeks. Prices rose for UK gilts, as its sovereign bonds are called, which was important as it was the day after the Bank of England ceased emergency support measures.

US markets have been following the wild gyrations in the UK as the self-inflicted crisis there has spooked investors watching globally for signs of stress that could cause a cascading effect elsewhere. Growth-stock heavy Nasdaq moved the most on Monday at 3-something-% followed by the S&P500 at 2-something-% and then the?Dow Jones Industrials?at 1-something-%, pretty much the reverse of Friday’s losses.

To put things in perspective, the S&P500 has now had a daily move of 2% or more in either direction thirty-nine times in 2022, (with ten of them being more than 3%.) In 2021 the S&P500 only moved 2% or more on seven occasions out of 252 trading days, and it didn't move more than 3% even once!

UK in the Hunt

Jeremy Hunt, the new UK finance minister, or Chancellor of the Exchequer, will reverse two-thirds of the unfunded tax measures announced three weeks ago in his sacked predecessor's “low-tax, high-growth” fiscal plan. With “economic stability” now the priority, the other one third is hanging by a thread over the rubbish bin as well (as is, some speculate, Prime Minister Liz Truss' job.)

The line from Downing Street since the end of last week has been "We went too far, too fast." The PM stays at No.10 Downing Street with the Chancellor at No.11. The PM repeated the line in TV interviews while insisting that she would "lead the Conservatives into the next general election" (due before 2024) but did add that she was "sorry, for the mistakes that have been made."

We are on Day 5 and the 60p Tesco lettuce battling Liz Truss to see who will last the longest is still looking quite crisp.

Hunt, a cabinet member for a decade before losing to Boris Johnson in the fight to become PM, may eventually take over from Truss and finally get the job. For the time being, power and credibility has moved to No.11 and some say he will play the role of "CEO" with Truss relegated to the face-saving role of "Chairman."

?2??FOCUS

Resilient US bank customers

Another reason for the strong overnight rally was better-than-expected earnings from Bank of America (which sounds like it should be but isn't a central bank.) Shares in the US$270 billion bank rallied more than 6%. During its third quarter results announcement, it followed peers JPMorgan Chase and Wells Fargo in raising its revenue outlook because of resilient US consumers.

MINI-EXPLAINER, a treat for you because you made it through another Monday:

• There is a trade-off for banks when interest rates go up
• Bad: New loans can fall (higher interest rates mean a higher cost for borrowers) and an economic slowdown can lead to losses from some existing borrowers, with more unable to make either interest payments or repay the principal borrowed. Fees, including those on investment banking deals (if any) also tends to be lower in a slowing economy.
• Good: The positive side is on pricing, where spreads, the interest rate it lends at (in loans to customers) vs the amount it borrows at (from its depositors) tend to be wider. This affects net interest margins and therefore net interest revenue, the difference in dollar terms between how much a bank earns on its loan book and what it pays out pays for deposits.

In Bank of America's case, net interest revenue in the third quarter surged 24% with net interest margins rising to 2.1% from 1.7% last year. Offsetting that, investment banking fees fell 46%, overall fee revenue dropped 8% and loan loss reserves were raised by US$378mn. All that added up to earnings per share (EPS) for the quarter of 81 cents, which was lower than the 85 cents last year, but much better than the 78 cents that highly-paid Wall Street analysts were (mis-)forecasting.

(Earnings per share, or EPS, is a company's profits after taxes divided by the number of outstanding shares, an easy way to see what you "get" per share owned. You usually won't actually receive that amount paid out to you -- it's more like what is generated by the company for you on your behalf as a part-owner.)