Aurelia Butler

NEW YORK (Reuters) – Options traders are bracing for volatility in U.S. bank shares days ahead of an earnings season many believe will bring lower profits and reflect worries over an expected recession.Current market positioning signals a gloomy outlook: The one-month moving average of open puts on the Financial Select Sector SPDR Fund, the largest financials ETF with nearly $33 billions in assets, outnumbers call options, 1.8-to-1, the most defensive this measure has been since late October. One standout trade on Monday saw a put buyer pay $1.5 million for 50,000 of February puts on XLF. The trade would be profitable if the ETF’s shares slipped below $33 by mid-February, a 6% decline from current levels. “What you are seeing in markets is some concern whether or not the operating environment is going to be favorable for financials,” said Scott Knapp, chief market strategist at CUNA Mutual Group. “It’s a challenging environment where it is tough to earn a nickel … markets are getting ahead by discounting some of that.” Bank of America (NYSE:BAC), JPMorgan Chase & Co. (NYSE:JPM), Wells Fargo (NYSE:WFC) and Citigroup Inc (NYSE:C) are set to report results Friday, with other lenders to follow next week.Shares of banks have been pummeled alongside broader markets in the past year as the Federal Reserve raised rates at a rapid clip to fight the worst inflation in decades. The S&P 500 bank index fell 21.6% last year, compared to a compared to a 19.4% decline for the S&P 500 as a whole.Banks shares have historically been volatile around earnings time and traders expect U.S. consumer price data on Thursday — which has set off big market swings in recent months — to add an extra dose of choppiness this time around.Options on big bank stocks, on average, are pricing the largest post-earnings moves in the last two years, an analysis by Susquehanna International Group showed. “The trading bias in the options heading into big bank earnings has been buying volatility and protecting positions,” said Chris Murphy, co-head of derivatives strategy at Susquehanna International Group. “It’s definitely more pronounced than it has been historically.” GRAPHIC: Braced for volatility (https://www.reuters.com/graphics/USA-STOCKS/akpeqaqekpr/chart.png) Many believe rising prices and higher borrowing will take a toll on lenders’ bottom lines by prompting consumers and businesses to curb their spending. Since banks serve as economic middlemen, their profits decline when activity slows.Analysts expect S&P 500 financial sector earnings to have declined by 8.7% in the fourth quarter from a year ago, tied with the technology sector as the fourth-biggest projected drop among major sectors for the period, according to IBES data from Refinitiv. Meanwhile, Goldman Sachs Group (NYSE:GS) will start cutting thousands of jobs across the firm from Wednesday, as it prepares for a tough economic environment, the latest among big banks, including Morgan Stanley (NYSE:MS) and Citigroup Inc, to cut their work force in recent months as a dealmaking boom on Wall Street fizzled out partly due to high interest rates.Not everyone has a gloomy outlook for the sector. In a Monday research note, Bank of America said financials have better earnings stability than the S&P 500, cleaner balance sheets and less recession risk than “other more crowded and expensive cyclical sectors like Info Tech.””U.S. financials may be a good spot to park assets in the near-term,” wrote Savita Subramanian, equity & quant strategist for BofA Global Research. More

Belgium’s prime minister has accused the US of an “aggressive” campaign to lure European companies to the other side of the Atlantic with the promise of support under its new green subsidy act.Alexander De Croo told a meeting at the European parliament on Tuesday that the US was seeking to undermine EU industry with the Inflation Reduction Act, a €369bn support scheme passed in August.“The US, our partner . . . they call our industry. And they tell them why are you investing in Europe? You should come over to the US. Calling German firms and Belgian firms in a very aggressive way — don’t invest in Europe, we have something better,” he told a seminar of his centrist Renew political group.He later told the Financial Times that the Americans “use the IRA in a very aggressive way to attract investment. You could say it’s fair game, but then you shouldn’t say: ‘Oh, we forgot about the impact on Europe’.“I mean, I think they were very well aware of the impact that it could have.”De Croo said Belgian chemical and steel companies had been approached. He said he did not know whether the federal government, US states or private-sector investment consultants had made the calls.But one EU official said the issue had been raised by other leaders too and it was seen as a concerted campaign. Many of the subsidies in the IRA are only available to companies operating or manufacturing in the US. The Biden administration has said it would try to find ways for European companies to access some of them by the way it implements the legislation. A task force between the EU and US has met several times and has made modest progress: a €7,500 electric vehicle tax credit will be available for EU-made vehicles sold under commercial lease deals, although not direct to consumers.

De Croo said the only answer to the “unfair” US act was to introduce similar subsidies. Ilham Kadri, chief executive of Solvay, the Belgian chemicals company, at the same event called for a “European IRA”.De Croo also accused Washington of “bullying” the Netherlands to impose a ban on exports of advanced silicon chipmaking equipment to China. The US is in talks with the Dutch and Japanese, the other countries producing machines that make the most advanced chips. “The interests of the US are not always the interests of the EU,” he told the meeting.He said the Netherlands was “being isolated” but should work with Brussels to resist the US demand. “Some of our partners don’t like the EU? Why don’t they like the EU? Because it is easy to bully one small country. It is much harder to bully a group of 27. Our unity is our strength.” More

The shocks of the past three years have hit all countries, but they have hit emerging and developing countries particularly hard. As a result, according to Global Economic Prospects 2023, just out from the World Bank, the convergence of average incomes between poor and rich countries has stalled. Worse, it might not soon return, given the damage already done and likely to persist in the years ahead.By the end of 2024, gross domestic product levels in emerging and developing economies are forecast to be 6 per cent below those expected before the pandemic. The cumulative loss in GDP of these countries between 2020 and 2024 is forecast at 30 per cent of 2019 GDP. In fragile and conflict-affected areas, real incomes per head are expected to have fallen outright by 2024. If the global economy slows more than is now forecast, as a result of tight monetary policy and perhaps other shocks, these outcomes could easily be worse. These losses, with all they mean for the plight of the world’s most vulnerable people, show the impact of the pandemic, the war in Ukraine, the rise in energy and food prices, the surge in inflation and the sharp tightening of monetary policy in high-income countries, especially the US, and consequent rise in the value of the dollar. An obvious danger now is that of waves of defaults in over-indebted developing countries. Taken together, these shocks will cause long-lasting effects, perhaps lost decades, in many vulnerable places.That has happened before. Indeed, it is what happened in Latin America after the debt crisis of 1982. This crisis, it should be recalled, also followed a surge in private lending to developing countries, then called the “recycling” of the surpluses of oil exporters. Unhappily, this surge in debt was followed by Iraq’s invasion of Iran, a second “oil shock” (the first being in 1973), a spike in inflation, a sharp tightening of US monetary policy and a stronger dollar. A disaster ensued — a debt crisis lasting a decade.

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Disturbingly, the recent tightening of monetary policy by the central banks of the Group of Seven leading economies has been more similar to those in the 1970s and early 1980s than to any since then, in both speed and size. On current market-implied interest forecasts, the cumulative rise will be close to 400 basis points over 17 months. The rise from May 1979 was ultimately bigger, but it also took longer. It is true that rates start from a far lower level this time. But that may not make that much difference if people have relied on these low rates. Moreover, the appreciation of the US dollar has been particularly strong. For the countries that have substantial external debt denominated in the US currency, this will also raise debt service costs sharply.It is helpful that borrowing this time was not so much from banks at variable rates, but in bonds, which have longer maturities and fixed rates. Nevertheless, a sudden cut off in the flow of credit will create a merciless squeeze. The World Bank shows a rise of 17 percentage points in spreads on sovereign borrowing in foreign currencies of commodity importing countries with weak credit ratings in 2022. Effectively, these countries are shut out of markets. Moreover, the external debt of Sub-Saharan Africa is high, too, at over 40 per cent of GDP. It is not surprising that there has been a huge decline in public and private bond issuance in emerging and developing countries since February 2022 compared with a year earlier.Inevitably, highly indebted countries that have already suffered the Covid shock and a sharp deterioration in their terms of trade, as food and energy prices soared, will now be in even more serious and enduring trouble. This will also include a large number of low-income countries where the livelihoods of many are already on the margins of survival. According to the bank, the number of people suffering “food insecurity” (that is, on the borders of starvation) in low-income countries jumped from 56mn in 2019 to 105mn in 2022. When might this reverse?We know, in addition, that many children lost parents during the pandemic and that their education was also seriously disrupted. Furthermore, physical investment has fallen sharply. Thus, for emerging and developing countries as a whole, the bank forecasts that aggregate investment in 2024 will be 8 per cent lower than expected back in 2020. If one adds the likelihood of long-lasting debt problems and so a cessation of flows of external capital, the possibility of a lost decade for convergence surely becomes highly probable for many countries. Needless to say, this will also not be an environment in which much progress will be made with the energy transition in many places.Covid was not these countries’ fault. The lack of global co-operation in tackling it was not their fault. The lack of adequate external official funding was not their fault. The global inflation was not their fault. The war is not their fault. But if the high-income countries do not offer the help they now evidently need, it will unambiguously be their fault.The high-income democracies wish to embark on a war of values with China. Well, here is one battle. A way has to be found to resolve the debt problems that are now emerging effectively and not, as happened in the case of Latin America, after almost a decade of pretence. A way has to be found to escape the vicious circle in which low creditworthiness begets unaffordable spreads, which beget debt crises and then even lower creditworthiness.That is not just in the interests of poor countries. It is also in the interests of rich ones. The problems of fragile and impoverished countries will become theirs, too. It is time to do things differently. Next week, I plan to consider [email protected] Martin Wolf with myFT and on Twitter More