Monday April 20: Markets Respond Positively to Earnings and PBoC Policy

Stocks rise after an accomodative policy stance from the People’s Bank of China and positive earnings reports. The S&P gains 0.9% to 2,100 and the Dow adds 1.2% to 18,034. China increased its monetary stimulus by lowering reserve requirements for banks by 1%. In addition, earnings from Morgan Stanley and IBM both contribute to the positive sentiment in markets. Following Friday’s inflation data which could lead to sooner action from the Fed, the dollar appreciates 0.4% and the 10 year yield rises 4 bp to 1.89%. In Europe, markets were more negative with no progress being made in Greece and the German PPI showing a 1.7% fall in the price level over the last year. As a result the euro depreciates $1.0737.

With no progress being made between Greece and its creditors, the country’s yields have been rising for the past seven days. Today, the yield on July 2017 bonds reached 28%. Without additional funds, Greece will default on its debt and run out of cash sometime within the next few months. Greece’s yield curve inverted on December 8, 2014 and the spread has widened since then. The country was due €7.2B in bailout funds, however this payment was frozen after Alexis Tsipras won elections and promised to end austerity measures imposed by creditors. As a result of these conditions, the possibility of a Greek exit of the eurozone rises each day. The head of the IMF Christine Lagarde urges Greek leaders to reach a deal in order to avoid a default. Greece has upcoming payments due to the IMF in May and June. In addition, the ECB holds a large amount of bonds that mature this summer. Without additional funds, it is almost guaranteed that the country will default on it’s debt sometime in the next few months.

Morgan Stanley reports its most profitable quarter since the financial crisis. The 14% return on equity represents the first double digit ROE since 2007. In addition, revenue, net income, and earnings per share results all far exceed expectations. In particular trading revenues grew 17% from the previous year. These results continue the trend set by Goldman Sachs and J.P. Morgan last week, as financial stocks have positively exceeded expectations so far this earnings season. This reflects the idea that banks are nearing a full recovery after the financial crisis, and that banks are adjusting to the new regulatory environment.

Paul Volcker suggests that the United States needs to consolidate its regulatory efforts similar to what the U.K. has done in recent years. Part of his concerns include the emergence of shadow banks and the role that non-banks play in the financial industry. He wants to strengthen the Fed and consolidate other regulatory agencies. In particular, he believes the Office of the Comptroller of the Currency should be closed and the SEC and CFTC should merge. Part of his concerns include the idea that regulation lags financial market innovations, and as a result of the different agencies there are many regulatory gaps. He believes that in the current environment non-banks that have increased their presence in recent years are more vital than financial institutions and it is a serious problem that regulation doesn’t affect these firms. These concerns are similar to complaints voiced by Jamie Dimon two weeks ago, when he asserted that the regulatory system is very inefficient and that banks should not have to pay several fines to different regulators as a result of the same infraction.

Monday April 20: Markets Respond Positively to Earnings and PBoC Policy

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