January 7, 2020
Markets aren’t completely ignoring rising Middle East tensions. As noted yesterday, the issue will likely be assigned an appropriate risk premium to, at least temporarily, keep a lid on multiple expansion. The bigger issue for broad markets over the next weeks will likely be details of US-China ‘phase-one’ and Q4 earnings. Next Wednesday is tentatively scheduled as the signing ceremony for ‘phase-one’ with markets mostly expecting the release of a detailed and specific text immediately thereafter. Note however, it’s still unclear when and even if we’ll see the text of the agreement. Without details (a vague one-pager won’t work) markets will remain skeptical about the growth benefits and the forward market multiple will likely contract from its presently assumed level of ~17.9x. Also note the earliest CQ4 earnings reports will come from large money center banks beginning next Tuesday. Financials posted strong gains from October-December as higher yields and curve steepening implies improved Net Interest Margins (NIMs). Banks still make the bulk of their money (up to ~65% in regional banks) from ‘borrowing short and lending long.’ And while we don’t think the move in yields is over for the cycle, we should note a good amount of lending disintermediation now coming from private equity firms and other institutions. In fact, the top line data shows bank lending-to-deposit ratios at their lowest level in 35 years. Bank NIMs should be ok, but maybe not as good as current levels suggest.