Next Week
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.