The market is digesting its recent gains Friday morning, including the Nasdaq and Nasdaq 100 hitting new all-time highs, as it assesses earnings reports from three major banks : JPM Morgan Chase (JPM) , Citigroup (C) and Wells Fargo (WFC) .
Action Alerts PLUS holding and Real Money Stock of the Day JPMorgan Chase has posted numbers that are better than expected and the stock is trading up about 0.5% so far. However, the issue with banks is not likely to be the numbers for the second quarter. The main issue facing banks is the yield curve.
Banks make money by borrowing money short term and lending it longer term.They need the yield curve to slope upward over time. The higher the 10-year rate is compared to the 2-year rate the better it is for banks. Unfortunately for lenders, the yield curve has been going in the wrong direction. Both the 2-year and 10-year rates have been rising but the two-year has increased faster and there is only a difference of about 30 basis points between the two durations.
That is the issue that will impact banks today, so it won't be too surprising if good numbers don't receive a big positive reaction. The market is concerned that the yield curve will continue to stay flat. The Fed can push up short-term rates but it is the market that controls the longer term rates.
The financial sector has recently been a laggard so what is more important from a trading standpoint is whether the market can build on the momentum in FAANG, technology, China-related stocks, biotechnology and other momentum names. There has been a higher level of choppiness lately and that may create a little caution among momentum chasers.
The obvious catalyst for the move Thursday was hope that the trade-war issue may see some progress. There aren't many comments in the business media about a positive outcome but it is clear that China has limited bargain power. It is faced with a weak stock market, a slowing economy and limited ways to respond. It was reported Friday morning that China's trade surplus with the U.S. has reached a record $29 billion, which is a bit ironic given the headlines about trade wars.
With some optimism about trade wars as a backdrop, the market is in good shape for upside follow-through as earnings season starts. The U.S. economy has been putting up good numbers, consumer confidence is robust, inflation remains below the Fed targets and the Trump tax cuts are still having an impact. The trade-war issue has been the big worry but that has actually helped to create a "climb the wall of worry" dynamic.
While the bears are busy formulating their usual argument about why disaster lies around the corner, the price action is suggesting that it is not the time to be too cautious. There was some excellent pockets of momentum on Thursday, some better charts and with big reports rolling in next week there seems to be little reason to fight the positive trend.