Mounting loan defaults Mid-Corona – XLF a sell?

0
65
Mounting loan defaults Mid-Corona – XLF a sell?

Mounting loan defaults Mid-Corona – XLF a sell?

Mounting loan defaults Mid-Corona – XLF a sell?

Earnings season kicked off last week with big banks like Wells Fargo, Bank of America and Goldman Sachs delivering Q3 earnings for Q3/2020 and giving some first insights into their business and revenues Mid-Corona.

While Goldman Sachs delivered some strong numbers, Wells Fargo and Bank of America disappointed.

Trading houses like Goldman outperform “classic” banks like Wells Fargo

Goldman Sachs earnings came in significantly above the expectation of $5.37 Earnings per Share (EPS) at $9.68 and revenue at $10.78 billion against $9.19 billion.

In general, it seems as if chances are high that US banks with a focus on trading continue to profit from the elevated volatility Mid-Coronavirus and before the US election.

But given recent developments around the Coronavirus lockdown, the focus in the US banking and financial sector will likely be more on those banks which are more defined by interest rates, consumer banking and commercial real estate since these will potentially paint a clearer picture on what to expect in terms of the US economic outlook.

That said, a look at Wells Fargo, one of the biggest US banks, seems to make more sense:

  • Wells Fargo’s total revenue of $18.86 billion was down 14 year-over-year, but slightly above expectations of $17.98 billion
  • That didn’t help in terms of EPS, which came in at $0.42 against an expected $0.45
  • Wells Fargo “only” set aside $769 million for credit losses in Q3, down from a staggering $9.5 billion in Q2/2020 and well below a FactSet estimate of $1.76 billion

CEO Scharf told investors that “[…]The trajectory of the economic recovery remains unclear as the negative impact of COVID continues and further fiscal stimulus is uncertain[…]”.

That sceptical outlook can also be seen in presented earnings from Bank of America:

  • EPS was $0.51 against $0.53
  • The bank set aside $1.4 billion for loan loss provisions, against $5.1 billion in Q2/2020
  • Net interest income is down 17%, coming in at $10.1 billion.

With our expectation of mounting defaults Mid-Corona and a further decline in US interest rates, our outlook for the US banking sector is not very positive.

How can you trade #XLF in this environment?

This leaves us with a bearish expectation for the Financial Select Sector SPDR Fund ETF (XLF):

While the ETF is currently trading around its SMA(200), we consider the overall mode on a daily time-frame bearish if bulls can’t sustainably recapture 26.00 USD, the region around the August/September highs.

A break below 23.00 USD should be considered bearish and would make a substantial stint lower to a target around the “Corona lows” of 17.50 USD in the months to come an option, with a stop-over at around 20.00 USD:

Admiral Markets MT5 with MT5SE Add-on #XLF Daily chartSource: Admiral Markets MT5 with MT5SE Add-on #XLF Daily chart (from April 01, 2019, to October 19, 2020). Accessed: October 19, 2020, at 09:00 AM GMT. Please note: Past performance is not a reliable indicator of future results, or future performance.

In 2015, the value of #XLF decreased by 1.74%, in 2016, it increased by 22.59%, in 2017, it increased by 22.0%, in 2018, it decreased by 13.04%, and in 2019, it increased by 31.88%, meaning that in five years, it was up by 52.3%.


Discover the world’s #1 multi-asset platform

Admiral Markets offers professional traders the ability to trade with MetaTrader 5, allowing you to experience trading at a significantly higher, more rewarding level than with MetaTrader 4. Experience benefits such as the addition of the Market Heat Map, so you can compare various currency pairs to see which ones might be lucrative investments, access real-time trading data, and so much more. Click the banner below to start your FREE download of MT5!

Trade With MetaTrader 5

Disclaimer: The given data provides additional information regarding all analysis, estimates, prognosis, forecasts or other similar assessments or information (hereinafter “Analysis”) published on the website of Admiral Markets. Before making any investment decisions please pay close attention to the following:

  1. This is a marketing communication. The analysis is published for informative purposes only and is in no way to be construed as investment advice or recommendation. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and that it is not subject to any prohibition on dealing ahead of the dissemination of investment research.
  2. Any investment decision is made by each client alone whereas Admiral Markets shall not be responsible for any loss or damage arising from any such decision, whether or not based on the Analysis.
  3. Each of the Analysis is prepared by an independent analyst (Jens Klatt, Professional Trader and Analyst, hereinafter “Author”) based on the Author’s personal estimations.
  4. To ensure that the interests of the clients would be protected and objectivity of the Analysis would not be damaged Admiral Markets has established relevant internal procedures for prevention and management of conflicts of interest.
  5. Whilst every reasonable effort is taken to ensure that all sources of the Analysis are reliable and that all information is presented, as much as possible, in an understandable, timely, precise and complete manner, Admiral Markets does not guarantee the accuracy or completeness of any information contained within the Analysis. The presented figures that refer to any past performance is not a reliable indicator of future results.
  6. The contents of the Analysis should not be construed as an express or implied promise, guarantee or implication by Admiral Markets that the client shall profit from the strategies therein or that losses in connection therewith may or shall be limited.
  7. Any kind of previous or modelled performance of financial instruments indicated within the Publication should not be construed as an express or implied promise, guarantee or implication by Admiral Markets for any future performance. The value of the financial instrument may both increase and decrease and the preservation of the asset value is not guaranteed.
  8. The projections included in the Analysis may be subject to additional fees, taxes or other charges, depending on the subject of the Publication. The price list applicable to the services provided by Admiral Markets is publicly available from the website of Admiral Markets.
  9. Leveraged products (including contracts for difference) are speculative in nature and may result in losses or profit. Before you start trading, you should make sure that you understand all the risks.

Source : https://admiralmarkets.com/analytics/traders-blog/loan-default-sell