Anxious Anticipation

Stocks are meandering between red and green this morning. Financial and energy sectors are the worst-performing. WTI crude oil is down under $69/barrel after OPEC modestly trimmed its 2025 outlook for global oil demand. Banks got hit after a profit warning from JP Morgan (see below).

Capital markets are highly reactive in front of the presidential debate and the Federal Reserve’s next policy meeting. Newberger Berman’s Holly Kroft calls it “anxious anticipation,” but says “none of it makes sense.” She expects continued volatility in the near-term without a real trend. Trading on discrete events like a Fed meeting is highly risky and often counterproductive to wealth creation.

Federal Reserve Vice Chair Michael Barr handed the US banking sector a gift today. He recommended softening some of the more onerous capital rules set to impact banks as part of the Base III international agreement. US bank CEOs have aggressively pushed back against this new, more strict, set of capital controls, saying it will unfairly disadvantage our global competitiveness. Mr. Barr issued a “re-proposal” which reduces the new capital reserve ratio to 9% from 19% for the largest banks. Those in the next size-tier down would be required to hold 3-4% in reserves. Smaller banks with assets less than $250bil would be largely exempt from new rules. However, in response to the 2023 mini-banking crisis, the re-proposal would require all banks to recognize unrealized capital gains & losses when calculating their regulatory capital buffers.

This announcement should have boosted bank stocks this morning, except that JP Morgan (JPM) issued a profit warning. Speaking at an industry conference, an executive said Wall Street analysts are too optimistic about the bank’s 2025 outlook for net interest income and expenses. In addition, his guidance for investment banking revenue fell short of analysts’ expectations. JP Morgan, like most banks, saw profits soar this year on the back of higher interest rates. But now that the Federal Reserve is poised to begin cutting rates, we could see a partial unwind of that windfall.