Worried about the economy? Watch US bank earnings

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Earnings season will begin with a bang. A slew of financial services companies are set to report results for July through September on Tuesday. The results will tell us a lot about both the impact of lower interest rates and the health of the global economy.

Coming up: Citigroup, Goldman Sachs, JPMorgan Chase and Wells Fargo will release third quarter earnings before US markets open.

The big question is the extent to which US banks have been hit by lower interest rates, which eat into lending profits. The Federal Reserve cut short-term rates twice this quarter, while fears about global economic growth weighed on long-term rates.

The sector’s stocks have clearly been sensitive to these trends — though they’ve also benefited from a broader rotation out of so-called “momentum” stocks, which recently outperformed the market, and into “value” stocks, which are thought to be trading below their true worth, per Keefe, Bruyette & Woods bank analyst Brian Kleinhanzl.

Investment banking could also show signs of strain this quarter after major deals, such as the WeWork IPO, were postponed, Stephen Biggar, director of financial institutions research at Argus Research, told me. (However, debt underwriting probably made up for some of that weakness as companies took advantage of low rates and refinanced.)

For those worried about the broader economy, attention will focus on loan growth, which has been sluggish. That leaves bank executives with the difficult job of communicating to investors that deceleration doesn’t indicate a crisis.

“The economy has not fallen off a cliff,” Biggar said, pointing to the continued strength of the US consumer and low unemployment. Credit quality looks better than you’d typically see at this point in the economic cycle, he added.

But Biggar also anticipates some evidence that business sentiment is weakening amid the trade war and other geopolitical concerns, weighing on corporate lending. The key piece here will be the outlook from executives for the rest of the year and into 2020.

Biggar’s question: “What dynamic changes to allow earnings growth to move higher?” On that front, a resolution on trade and a resuscitation of global manufacturing looks necessary — though at this point, it’s certainly not a given.

Facebook is bleeding Libra collaborators

This was supposed to be a big week for Libra, Facebook’s cryptocurrency project. The governance board, the Libra Association, held its inaugural meeting in Geneva on Monday — and under different circumstances, there might have been more fanfare.

Instead, excitement was muted. Facebook is contending with a string of defections as top companies — including Visa, Mastercard, Stripe, eBay and PayPal — confirm that they will not be among the founding members of the association, as previously announced. Booking Holdings, the parent company of Booking.com, confirmed Monday that it would also leave the Libra Association.

Facebook is putting on a brave face. The social media giant announced that 21 companies — including venture capital firm Andreessen Horowitz, Coinbase, Lyft, Spotify, Uber and Vodafone — did sign on to the group and collectively voted on an executive team.

“Awesome day today,” tweeted David Marcus, who heads the Libra effort at Facebook. On Friday, he said he “would caution against reading the fate of Libra” into the news that Visa and Mastercard were stepping aside.

But regulatory scrutiny of both Facebook and its partners on the project looms. Shortly before Stripe, Mastercard and Visa pulled out of the organization, US Democrats sent those companies letters sharing “deep concerns” about Libra.

“Your companies should be extremely cautious about moving ahead with a project that will foreseeably fuel the growth in global criminal activity,” they wrote.

What fund managers are telling Bank of America

Recession concerns are still weighing on investors and hitting their appetite for risk. But there are some early signs of optimism, according to Bank of America Merrill Lynch’s October survey of fund managers.

The bank found that 31% of fund managers surveyed expect a global recession in the next year, but 67% see that as unlikely. The top concern continues to be trade, followed by the ineffectiveness of monetary policy and a bond market bubble. The most crowded trade? Long US Treasuries.

When asked about a resolution of the US-China trade war, 43% said it was the new normal and wouldn’t be resolved, while 36% said they expected a solution before the 2020 presidential election.

“Investors remain bearish but we are seeing signs of green shoots,” said Michael Hartnett, the bank’s chief investment strategist. “If concerns about the trade war and Brexit are unrealized, sentiment is likely to improve, validating our bullish tactical views.”

Up next

BlackRock, Charles Schwab, Citigroup, Goldman Sachs, Johnson & Johnson, JPMorgan Chase and Wells Fargo are scheduled to report earnings before US markets open. United Airlines will follow after the close.

Also today:

• The Empire State manufacturing survey for October posts at 8:30 a.m. ET.
• The World Bank and IMF will deliver their outlooks for global growth.

Coming tomorrow: A big week for corporate earnings continues with Bank of America, IBM and Netflix.