Financials Overview: Week of July 3–7, 2017
Risk still persists in the US banking sector
The US OCC (Office of the Comptroller of the Currency) found that despite a strong financial performance, the US banking sector still faces risks, which are beyond the sector’s control. The OCC found that risks to banks emanate from competition posed by non-financial lenders and different methods adopted for money laundering and terrorism financing activities. Banks rely on outside firms to carry out critical activities or provide cyber security—another area where banks could be vulnerable to major threats. The OCC said that loan growth in commercial real estate and relaxed underwriting standards are also major areas with risks.
Financials continued to lead the market
Last week, financials got a boost after major banks cleared the latest round of the Fed’s stress tests. News that most banks plan to return huge amounts to shareholders continued to push bank stocks higher. Financial stocks rose 1.5% last week—compared to a 0.1% gain in the broader S&P 500 Index (SPX-INDEX). Morgan Stanley (MS) rose 3.3%. JPMorgan Chase (JPM), Bank of America (BAC), and Citigroup (C) had respective gains of 2.7%, 2.3%, and 1.5%.
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The Financial Select Sector SPDR ETF (XLF) rose 1.6%, while the Vanguard Financials ETF (VFH) and the SPDR S&P Regional Banking ETF (KRE) rose 1.2% and 1.3%, respectively. On the other hand, the S&P Insurance Select Industry Index (SPSIINS) posted moderate gains of 1.10% last week.
MetLife will acquire Logan Circle Partners
MetLife (MET) agreed to buy investment manager Logan Circle Partners, the traditional fixed income asset management business of Fortress Investment Group (FIG), for $250 million in cash. The acquisition is expected to close in 3Q17. It won’t impact MetLife’s $3 billion share buyback program, which is expected to be completed by the end of this year.
ETF inflows continued at a moderate pace
After strong gains last week, ETF inflows rose moderately this week. According to Factset, US-listed ETFs witnessed $2.5 billion in inflows during the week, which brings the year-to-date total to $251.6 billion. US equity witnessed outflows worth $1.7 billion, while international equity added $3.2 billion. US fixed income continued to show its popularity compared to equities with inflows worth $2.7 billion.
Inflows were led by the iShares Core MSCI EAFE ETF (IEFA) with net additions of $1.6 billion followed by the Financial Select Sector SPDR Fund (XLF) with $1.0 billion and the iShares Core U.S. Aggregate Bond ETF (AGG) with $985 million. Year-to-date, the iShares Core S&P 500 ETF (IVV) has seen inflows of $17.6 billion, while the iShares Core MSCI EAFE ETF (IEFA) has seen inflows of $11.3 billion.
Outflows were led by the SPDR S&P 500 ETF Trust (SPY), the iShares JP Morgan USD Emerging Markets Bond ETF (EMB), and the iShares Core S&P Mid-Cap ETF (IJH) with redemptions of $1.3 billion, $1.0 billion, and $888 million, respectively.
More rate hikes on the way
The Fed expects the US economy to strengthen at a moderate pace that would require more rate hikes. The Fed expects one more rate hike this year and another three hikes in 2018.
JPMorgan Chase, Wells Fargo, and Citigroup are set to deliver their 2Q17 earnings reports next week. The market expects a mixed earnings season despite rising interest rates and recent clearance from the Fed in the stress tests.
The Bank of Canada is expected to hike its rate on July 12 due to strong economic indicators like the robust jobs report and improved trade data. In China, trade data and inflation data will be released this week, while unemployment data will be released in the United Kingdom.