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Bank earnings approaching as downgrades continue

With Japan on holidays for Showa Day yesterday, the reverse in the ASX was rather strong, but not unexpected. 

Profit was locked in, two major investment banks downgraded their outlooks on the big four banks (particularly NAB) and financial regulation in China on collateral financing continued to spook investors with exposure to materials.

From the trade seen overnight, these issues will likely be alleviated with Japan back online today and the general market swings in the US. However, I am very wary of the fact that the bank yield trade is becoming very crowded.

This morning has seen another major investment bank downgrading a bank - this time it’s Westpac and the expected ‘dividend bonanza’ that has become the custom heading into earnings over the past three years is beginning to slow and is becoming less and less appealing the higher the share price.

I am also very aware of the possible increase to interest rates from the RBA over the coming year which could have a double effect. Yield hunters that have seen the banks as a cash cow will see value in debt instruments elsewhere, particularly treasuries which will see selling of the financials. The increase in rates will also impact net interest margins as funding costs increase, which is why NAB and WBC are under the most pressure as their NIMs are already slim; a 25 plus basis point rise will further impact funding costs and put margins in a vice as loan competition ramps up.

The record profits expected from the three reporting banks from tomorrow will eventuate - I have no doubt about that - but considering the very strong share price rises over the last three years and the fact that banking revenues could see pressure over the coming 12 months, it’s the forward guidance the market is likely to concentrate on for a leg higher. Do not be surprised to see exceptional earnings and profit numbers, with the banks struggling to print higher highs.

Macro data deluge approaching     

Today sees the BoJ meeting with governor Kuroda expected to give a press conference at  approximately 16:30pm AEST. Expectations are for no further easing, however the market is anticipating changes to its economic projections.

Kuroda himself has been relatively upbeat and almost hawkish of late, suggesting the Japanese economy is responding well to its current monetary stance and is on track to meet the inflation goals, just not as fast as originally forecasted. So the market is therefore positioned with this in mind, and any dovish narrative that hints at monetary policy easing in the future should see the JPY weaken across the board, making USD/JPY a one to watch today.

US growth is expected to show the smallest growth read in a year, but leading indicators remain mildly positive, meaning it is unlikely there will be any change in rhetoric from the FOMC and Janet Yellen over the next two days as they meet in Washington; the next macro catalyst from the US is Friday’s non-farm payrolls print.

The likely acceleration in headcount is gaining further momentum as the US earnings season continues to beat expectations, with 74% of companies beating on the earnings line. Economists now expect 215,000 jobs were added in April - the first plus 200,000 print since the winter freeze and a very positive sign that the underlying US economy is humming along. USD strength is the likely outcome of the coming three days of data.

Ahead of the Australian Open

We are currently calling the market higher to 5506 on the 10am bell (AEST) up 20 points; BHP’s ADR is pointing higher suggesting the mining giant might stem some of the bleeding from the previous week. However the downgrade to Westpac will not help the bank trade and could see the sell-off from yesterday following on into today’s trading. It is not hard to make a case for the ASX to follow yesterday’s trade.

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