Financials Overview: Week of June 12–16, 2017
Revamping US banking regulations
On June 12, 2017, the White House issued recommendations to relax banking regulations due to a significant improvement in the financial system and renewed economic growth. The report also recommended easing stress tests for banks, making the process simpler and more transparent.
The overhauling of banking regulations is expected to benefit major US banks since it will free up a substantial amount of capital. According to calculations by Goldman Sachs (GS), the five largest banks, excluding Goldman Sachs, have $96.0 billion in excess capital. Bank of America (BAC) said the plan might release approximately $2.0 trillion in additional lending. Other major banks such as Citigroup (C) and Morgan Stanley (MS) welcomed the proposal.
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Select banking stocks reacted positively to recommendations
The day after the proposal was released, Goldman Sachs (GS) and Morgan Stanley (MS) stocks rose in hopes they will benefit from the easing of capital requirements and liquidity standards as well as lighter supervision. The S&P ended the week with a rise of 0.30%, while the S&P 500 (SPX-INDEX) rose marginally 0.06%.
The Financial Select Sector SPDR ETF (XLF) remained flat for the week, while the SPDR S&P Bank ETF (KBE) and the SPDR S&P Regional Banking ETF (KRE) fell 0.90% and 1.2%, respectively. On the other hand, the S&P Insurance Select Industry Index rose 1.5% last week, and the SPDR S&P Insurance ETF (KIE), the largest insurance fund, rose 1.2%.
Citigroup looking at ways to return excess capital to shareholders
John Gerspach, CFO (chief financial officer) of Citigroup (C), said at a conference that the bank is looking at more efficient ways to meet regulatory requirements so it can return excess capital worth $45.0 billion to its shareholders. It’s worth noting that US regulations currently don’t allow big banks to return capital to shareholders through stock repurchases or dividends without approval from regulatory authorities.
US mortgage rates edge higher
According to Freddie Mac, the average 30-year fixed-rate mortgage rose to 3.91% last week from 3.89% in the previous week. The rate for 15-year mortgages rose from 3.16% to 3.18%. In 2016, the 30-year rate averaged a record low of 3.65%.
Massive ETF inflows
According to Factset, US ETFs witnessed a whopping $30.4 billion worth of inflows during the week. With this, total ETF assets crossed $3.0 trillion for the first time. According to Bloomberg data, during the last 12 months, ETF inflows totaled $466.4 billion. Around 70.0% of the total inflows during the week were in US equities. About 15.8% were from international equities. US fixed income had 11.0% inflows.
The SPDR S&P 500 ETF (SPY) attracted the largest inflows of $6.5 billion, followed by the iShares Core S&P 500 (IVV) with inflows worth $2.5 billion and the iShares Russell 2000 ETF (IWM) with inflows of $1.9 billion.
Fed hikes interest rates
Last week, the Federal Reserve increased interest rates from 1.0% to 1.25%, citing continued US economic growth and job market strength that have driven the unemployment rate down to its lowest level in 16 years. As part of the monetary policy normalization process, the Fed has now increased the interest rate four times since December 2015. The Fed signaled more hikes in the future due to expectations of continued economic growth. It raised its economic growth forecast this year to 2.2% from the 2.1% it projected in March. Inflation is expected to be 1.7% by the end of this year, down from 1.9% forecast previously.
The Fed also plans to reduce $4.5 trillion worth of bond holdings that it acquired in the wake of the recession to kick-start the economy.
UK closer to rate hike
In its latest policy meeting, the Bank of England kept its main interest rate unchanged at a record low of 0.25%. However, three out of eight members sought a 0.25% increase due to a spike in inflation, which is hovering at around 2.9% annually and far higher than the central bank’s target of 2.0%.
The Bank of Japan maintained its interest rate at -0.10% and vowed to continue with its policy of qualitative and quantitative easing to help attain an inflation rate of about 2.0%.
Be sure to watch the US current account data for 1Q17 this week as well as data for existing and new home sales for May. The current account deficit for the United States is expected to widen from $112.4 billion in 4Q16 to $121.8 billion in 1Q17.
The Reserve Bank of New Zealand will announce its decision on the interest rate on June 22, 2017. It’s expected to maintain the record-low cash rate for the remaining part of the year.