Did Big Bank Stocks Kick Start a Big Rally?
The market moseyed its way higher yesterday. Volume was below average, again. And 1197 continued to provide resistance to SPX. Also, banks were noticeably weaker, along with technology stocks.
The big bank stocks should have an interesting session today considering 37 of them were downgraded last night. Immediately following the close Standard and Poor's downgraded 37 banks, mostly U.S. banks. Wall Street "icons" like Bank of America (NYSE: BAC), Goldman Sachs (NYSE: GS) and even a few European banks, like Barclays (NYSE: BCS), all received credit downgrades.
When a rating agency like Standard and Poor's downgrades a company, debt becomes more expensive. Since it costs more money to borrow, a lower credit rating can limit liquidity materially. Banks have been unwilling to lend money in the past and if liquidity is constricted it could damage the entire economy.
I have been following the bank stocks for the past few months to try and gauge market direction. It continues to be my investment belief that a big market rally will likely include (if not be led by) financial stocks. The big rally in financial stocks at the beginning of October was one reason I aggressively traded the market long. The continued weakness in the bank stocks over the past few weeks is also why I haven't entered new trades.
Yesterday's downgrade of 37 big banks was a big deal, but the bigger news is how bank stocks react today. Additionally, and curiously, the same report released yesterday that downgraded 37 financial institutions upgraded two Chinese banks. Both China Construction Bank and the Bank of China were moved up one rating.
Separately, the PBC lowered its reserve requirement last night for banks by 50bps. Over the past few months I have written that China will begin to lower rates. China had aggressively raised interest rates over the past two years to combat inflation. But high interest rates have the unfortunate side effect of slowing down economic growth.
Clearly, the Chinese are more concerned about future growth than inflation. And yesterday's interest rate hack is likely the first of many.
While the credit downgrade discussed earlier impacts liquidity, a daring move this morning may have resolved the problem. Issued minutes before the open, central bankers around the world have agreed to lower dollar swap rates. The lower swap rate provides more liquidity to domestic banks. And big bank stocks should love reading that.
In addition to the positive news from global central banks, the jobs report data this morning was solid. ADP reported that 206,000 jobs were added in the U.S. in November. If accurate, the 206,000 additions dwarfs analyst estimates of 125,000 and is also a strong gain from the 130,000 in October. If the U.S. market doesn't rally hard today, it's really bearish.
