Banks surprise to upside, as Carney and EU 'progress' fail to lift the pound

If you are searching for market direction today then US banks could be the place to look. Morgan Stanley delivered better results than expected, with profit 11 cents higher per share than was expected, Goldman Sachs also smashed expectations, showing that they have turned things around after a dismal Q2. Traditional global investment banking activities are struggling to make banks’ money, however it looks like Morgan Stanley and GS have done well to re-balance their business, with rising wealth management profits for MS and a growing lending business for GS helping to keep these banks in good shape.

Goldman turns its fortunes around and surprises market

Perhaps the biggest shock was the better than expected turn from Goldman Sachs, which has recovered from Q2’s major disappointment. Earnings per share beat forecasts of $4.25 and came in at $5.02, trading revenue was also stronger than expected, rising $3.12bn, beating estimates of $3.04bn. Interestingly, fixed income trading, which was Goldman’s Achilles heel in Q2, performed better than equities trading last quarter with revenues from FICC coming in at $1.45bn vs, estimates of $1.37bn. This suggests that Goldman management have taken steps to address the problems in this area, even though their peers are still struggling with trading revenues.

Like Morgan Stanley, Goldman has also been diversifying its business, and it looks like its bet on lending, and on its online consumer lending business Marcus in particular, has paid off, as revenue increased by 35%. If this pattern continues, then new business for Goldman Sachs could help to offset any continuation of declines in its institutional services business in the future, although its institutional advisory business remains a strong revenue generator for now.

GS leads US bank stocks higher

Overall, this is a solid set of results from GS and Morgan Stanley and we are already seeing US futures markets rush to price in a higher open for the major US markets later today. We could see the banking and finance sector do well, as major bank stocks are expected to open higher across the board with Goldman leading the way, the pre market expects a 1.5% gain for this stock at the open, followed by a 1.14% rise for Morgan Stanley.

Further declines expected for GBP

The pound has reached a new intra-day low as the Bank of England’s Mark Carney failed to commit to a rate hike next month only saying that a rate hike might be appropriate in the “coming months”, when he testified to the Treasury Select Committee earlier.  Not even signs of progress between Juncker and May over dinner in Brussels was enough to lift the pound substantially on Tuesday, and it may move back towards $1.3150, the 50-day sma, in the short term. Before Carney had even taken to the mic at the Treasury Select Committee UK bonds and short sterling futures started to rally, suggesting that the market had expected a dovish turn from the BOE Governor.

Carney limited as November rate hike basically priced in

In fairness, with a near 80% chance of a UK rate hike next month now priced in to the interest rate futures market, the prospect of Carney moving the dial on interest rates at today’s testimony was always slim. In fact, one could argue that Carney may have wanted to cool rate hike speculation just in case there are some weak data points between now and early November that could kill a rate hike, which may be why some long sterling traders bailed out on their positions as Carney started to speak.

GBP outlook: benign uncertainty keeps it range bound

The technical picture is also starting to look bleak for GBP/USD after Monday’s daily bearish engulfing candle, this could trigger further declines back to 1.3150 initially, the 50-day moving average. Some had hoped that the mixture of news from May’s intervention in the EU Brexit talks along with Carney’s testimony would be enough to give a sense of the pound’s direction for the rest of this year. No such luck. Today’s news and economic data (CPI reached a 3.5 year high), have so far failed to give the pound anything like a clear picture of where it is going next. Although the signs are looking like a lurch lower in the short term are on the horizon for GBP/USD, we think that we could be stuck in range bound conditions for the rest of the year, as benign uncertainty prevails. To explain out view on benign uncertainty further: even if the BOE hikes in November there is no clear view on what steps they will take after, and the Brexit talks are unlikely to come to any conclusions between now and year-end, which could leave GBP rudderless in the coming weeks.