Volatility in the broader indices has petered out over the past month, to the point where 30 day realized volatility in the S&P 500 index has actually hit a 10 year low this week:
The lack of movement is not exclusive to stocks, as most major asset classes are near decade lows in volatility (see our Snapshot from last month). As a result, traders don’t expect much movement after today’s payrolls report, especially since today’s session is a half day (close at 1:00 pm EDT) and tomorrow is Independence Day in the U.S. So far, the report is stronger than expected, and SPX futures are exactly unchanged, an indication of the broad market environment more than the news itself.
Earnings season kicks off next week with Alcoa on July 8th. The financials sector is the busiest in the first week of earnings season, with WFC reporting on July 11th, followed by C on July 14th, JPM and GS on July 15th, BAC, PNC, and USB on July 16th, and MS on July 17th.
The 10 year yield is touching a new 2 month high today after the strong jobs report:
Rates moving lower over the past 6 months has generally weighed on the financials sector. The XLF / SPY ratio is near 52 week lows:
However, not all financials stocks are created equal. The move lower rates has especially impacted regional banks, and KRE, the regional banking ETF, is unchanged on the year (vs. +4% for the financials sector as a whole). The largest commercial banks, like WFC, USB, and PNC, have actually outperformed both the S&P 500 index and the broader market, as they have benefited from loan growth, solid credit conditions, and acquiring market share from smaller competitors.
On the flip side, investment banking stocks have been hurt by the dismal results in their trading operations, which have more than offset the strength in the capital markets from the robust IPO and M&A pipelines. Dan Greenhaus of BTIG tweeted a chart illustrating those weakening results in the trading divisions:
With no volatility and low volumes, as well as the President chiming in on bank bonuses, the environment for trading desks seems unlikely to improve in the near term. We expect weak results and guidance for the investment banks, even as the rise in rates might be a welcome sign for the rest of the financials sector.