Financial Markets Quiet as Q2 Corporate Earnings Commence

 

Corporate earnings season kicked off today, headlined by Citigroup who beat expectations on the back of the revenues achieved from the Tradeweb IPO. Later this week financial markets will receive the Q2 results from other large banks such as J.P. Morgan, Goldman Sachs, and Bank of America. Overall expectations for Q2 earnings growth are tempered, with median forecasts pointing to a 3.1% YoY decline. US equities held within a tight range throughout today’s session, with major indices squeezing out modest gains to post new record highs. The tech-heavy Nasdaq led the way with a 0.17% increase on the day. Treasurys extended Friday’s rally, as yields/swap rates declined 2-5 basis points across the curve in a bull flattening pattern. Bond markets will be paying close attention to a gaggle of Fed speeches throughout this week for any clues as to the future path of interest rates, including a speech from Fed Chair Jerome Powell tomorrow afternoon.

 

 

New York Fed President John Williams called out the large financials today, urging them to expedite the transition away from LIBOR. “I want to emphasize that the industry must not wait for a SOFR term rate to transition away from LIBOR, we need a mind-set shift where firms realize that every new U.S. dollar LIBOR contract written digs a deeper hole that will be harder to climb out of,” Williams stated. LIBOR-based transactions continue to account for nearly 50% of derivatives trading volume worldwide. The future of LIBOR post-2021 remains widely debated, however Andrew Bailey,  the CEO of the Financial Conduct Authority, caution that in 2022 “if you are still on LIBOR, (the future) will be more uncertain than ever.” Robust LIBOR fallback language continues to be of central importance for newly issued contracts (contact Derivative Path for sample language).

 

 

The Chinese economy continues to feel the burn from the tariff trade war. Overnight China reported its slowest quarterly economic growth since 1992 (6.2% in Q2), largely impacted by reduced investments as business owners tightened their pockets amid the tariff uncertainty. President Trump took a break from defending his controversial tweets over the weekend to highlight the effectiveness of his trade negotiations, “This is why China wants to make a deal with the U.S., and wishes it had not broken the original deal in the first place.” Energy markets seemed to stumble in sympathy with further evidence of a struggling Chinese economy, as WTI crude oil declined more than 1% to $59.60/barrel with the threat of decreased global demand.