CFDs are a leveraged product and can result in losses that exceed deposits. Please ensure you fully understand how CFDs work and what their risks are, and take care to manage your exposure. CFDs are a leveraged product and can result in losses that exceed deposits. Please ensure you fully understand how CFDs work and what their risks are, and take care to manage your exposure.

US banks prosper in 2018

The quality of US bank earnings belies the weak performance of the sector’s stock prices. Now investors wait for a price signal to confirm the strong fundamentals.

The year 2018 was a bumper year for the US bank sector, which might strike investors as odd given the rout in the sector’s stock prices. Overall, the big US banks reported profits of more than $120 billion, as the sector reaped the benefits of the strong US economy and tax cuts imposed by US President Donald Trump.

One highlight was the spread between loan earnings and deposit costs. This was better than expected, with deposit costs rising at a slower rate than feared. In this environment of rising interest, the banks appear to be doing well.

Despite being cited as a reason for stronger earnings, trading revenue was weaker than expected. Investors appeared to prefer staying on the sidelines, or sitting on their hands, to repeatedly moving funds in and out of positions. Bond trading revenue was particularly weak, down by almost 20% at Goldman Sachs for example. However, banks said that January trading activity had been better.

In the accompanying conference calls, bank leaders were keen to stress that economic growth was better than that indicated by official updates, and that the recent volatility overstated the bearish case. In addition, credit markets are not flashing warning signs in the way that was seen in 2008.

There are of course clouds on the horizon. A potential intensification of the US-China trade war would work against further economic growth, while the ongoing government shutdown has started to make its presence felt in lending to consumers and businesses, and also hurting the pipeline of initial public offerings (IPOs) due to the closure of the US Securities and Exchange Commission (SEC).

Notably, the final quarter (Q4) of 2018 has seen an increase in insider buys of bank stocks, echoing the moves made by Jamie Dimon in 2016 when that banker stepped in to buy up JPMorgan shares as the market bottomed out following the growth scare of 2015/16. While this is not a foolproof guide, it makes more sense to look at buying bank stock when senior executives are buying too, rather than buying when bank bosses are selling.

Bank stocks have soared since the December low, as seen by the Financial Select Sector SPDR Fund (ETF XLF). However, the price has yet to break downtrend resistance from the September highs. This would require a close above 250, clearing both horizontal and trendline resistance. This would be a good step to creating a higher high, however, it still requires a close above the November/December high around 2750.

This information has been prepared by IG, a trading name of IG Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.
CFDs are a leveraged products. CFD trading may not be suitable for everyone and can result in losses that exceed your initial deposit, so please ensure that you fully understand the risks involved.

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