Thursday, August 7, 2014
Interest rate decisions out of Europe, a favorable U.S. Jobless Claims report, and reports of a huge bank settlement provide a reassuring backdrop for today’s trading action. Stocks are broadly indicated to open in the green, but any unsettling headlines about the continued Ukraine-Russia stand-off could change that.
The bigger-than-expected drop in initial Jobless Claims this morning – down 14K to 289K, with 4-week average now down to 293.5K – is another positive read about the U.S. economic outlook. With initial claims now at levels prior to the financial crisis, the labor market improvement process appears to have gained pace.
Recent ISM surveys and other economic readings appear to be pointing in that direction as well. This is the reason that why investors have started paying more attention to the Fed, though safe-haven flows resulting from geopolitical flashpoints appear to be offsetting interest rate anxieties at present.
The European Central Bank has the opposite issue – they are faced with the threat of deflation and loss economic momentum in economies in the region, with Italy back in recession, France stagnant and German data at best mixed. The ECB left rates unchanged this morning, hoping to give more time to their June easing measures to trickle down. But they have a tough job in front of them as the deflation threat to currency bloc remains very real.
Moving from central banks to money-center banks, Bank of America (BAC) is reportedly getting close to settling its outstanding mortgage fraud related issues with the Justice department, but the $16 billion to $17 billion in reported price tag for the deal represent a new record. The complaints and investigations being settled here pertain to mortgage related issues in the run up to the global financial crisis of 2008, which the bank got exposed to mostly as a result of its Countrywide Financial acquisition.
Including the roughly $6 billion settlement with the Federal Housing Finance Agency some time back, Bank of America’s mortgage related price tab reaches close to $23 billion. Bank of America’s roughly $17 billion settlement will eclipse the $13 billion settlement between J.P. Morgan (/JPM) and the Justice Department reached last year on similar issues.
The Wall Street Journal reports that the deal isn’t final yet and could still fall apart. But if completed, it will represent a milestone for Bank of America in turning the page on its seemingly never ending legal liabilities. This would enable the bank to focus more sharply on bringing its profitability in-line with J.P. Morgan and Wells Fargo. Bank of America’s earnings were down in Q2 from the same period last year, unlike the flattish results from its peers.
Second quarter results for the big banks didn’t show any growth, with improvements in investment banking and lending offset by weak mortgage banking and capital markets businesses. Given Wells Fargo (WFC)-type domestic orientation, Bank of America could benefit from the improving U.S. economic outlook. But it needs first to put the crisis-era legal troubles behind it.
Director of Research
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