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Banks on the Edge

By Marius-Cristian Frunza
Weekly Briefs

Since 2008 financial regulators across the world put more pressure on banks to increase their prudential capital. Lehman’s default was hard to digest within the financial sector, and the primary goal of financial regulators was to prevent a systemic bank from going bankrupt. Will be those regulations effective amid the COVID crisis?

Adam Smith believed that an “invisible hand” wipes out periodically market players who are not able to propose cost-effective products. The same principle applies to banks. It does not matter how much regulatory capital a bank holds because, during a crisis, a bank needs more than liquidity. It requires the ability to deal with tense situations and to manage doubtful assets.

Major cities are on the brink of a significant real estate crisis, and the traditional banks are directly impacted. The mortgage and commercial loans portfolio will go through severe impairments in the light of the recently implemented accounting norms known as IFRS 9. Most banks need to pass provisions based on the expected loss projections of their portfolios. The consequences are already visible on the market capitalization. The American leading stock index the S&P 500 recovered well after the pandemic outbreak and reached a historic climax last week. The S&P financial index barely regained 50% of the March losses, thereby underlining the distressed situation of banks. Needless to say, that financial institutions are losing ground despite the massive injection of liquidity from central banks.

Many investors are already reducing their exposure to their financial sector and explore alternative avenues.

Banking may well be a career from which no man really recovers.
John Kenneth Galbraith, Canadian-American economist

Market overview

The Dow Jones reached this week the psychological level of 29,000 not far away from its historical peak marked earlier this year. Nasdaq and S&P 500 are already claiming new records. The market is seemingly going to a smooth recovery. Nevertheless, the volatility index(VIX) spiked suddenly from a relatively low value to the mid-August maxima. This counterintuitive move shows that markets are at crossroads and the foreseeable future is highly uncertain. Investors should be cautious about their long-term positions. It is probably the right moment for portfolio rebalancing. The profit-takers that took advantage of the market rally over the past six months may find that it is the right time to mark to market their gains. This phenomenon may bring additional pressure on prices, and we can end in a situation where the market is overbought.

The November election in the US will generate additional volatility but will also bring answers to many questions.

Focus:

TESLA

Tesla became last month world’s biggest automotive manufacturer in terms of market capitalization. The coronavirus pandemic was a once in a lifetime opportunity for the San Carlos-based giant to expand its operations. Tesla’s stock went through an exponential rally since mid-March, but in the last trading sessions of this week lost almost 20% of its value. Is this just a point-in-time correction or is Tesla navigating in murky waters?

There are good reasons to believe that sunny days for Tesla are behind. Market volatility is increasing, and many investors will start to cut their positions in stocks that performed well, thereby monetizing their profits. Another issue is that when liquidity is abundant, investing is not anymore, a science, but a popularity contest. Nasdaq-listed stocks seemed to have had the upper hand in this contest, but now the investors may start to look at fundamentals and questions whether valuations are justified or not.

Tesla and several technology companies may experience big market swings in the next months.

European airliners:

Wizz Air is a wizard of airlines

Airlines are suffering all over the world, and it is not a secret anymore. Traditional airlines seem to have taken a heavier hit from the pandemic compared to their low-cost peers. Amongst the European air-carriers, one seems not only to suffer less but also gives the impression of thriving when others are asking for governmental bailouts. Wizz Air, the Budapest based low-cost, listed on the London Stock Exchange, shows a good price recovery during the summer compared to its peers.

Ryanair, the European leader of low-cost airlines, was forced to downsize its staff amid the pandemic and to reduce the number of flights.  It was a straightforward approach to mitigate the losses and to enter in a survivor mode. Meanwhile, Wizz Air expanded its locations and opened new destinations. The challenger believes that it is a perfect moment to take over the territories abandoned by other airlines.

Air France, the European leader of the traditional air carriers, are struggling. The merger with KLM seems not to go to well, and the French giant is in a continuous restructuring process for more than a decade. Pandemic is not the right time to have too many problems.

Market outlook

Markets ended the week into reserved mood.  The Dow Jones found momentum and climbed above 29,000 but retreated to a support level around 28,000. Meanwhile NASDAQ climbed to 12,000 but did not manage to find support and lost almost 1,000 points in few trading sessions. The stock market could enter negative territory over the next weeks. Time will tell whether these losses may generate a downward spiral.

The Gold ounce went south, but the perspectives are positive. High volatility will remind investors that gold is a safe harbour. Bitcoin had an interesting week after touching 12,000 USD and retreating by almost 2,000 US in three day. The current circumstances may attract new flows in the cryptocurrencies’ market. Therefore, Bitcoin has potential to find a new momentum.

General Disclaimer

The information and data published in this research were prepared by the market research department of Darqube Ltd. Publications and reports of our research department are provided for information purposes only. Market data and figures are indicative and Darqube Ltd does not trade any financial instrument or offer investment recommendations and decision of any type. The information and analysis contained in this report has been prepared from sources that our research department believes to be objective, transparent and robust.

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