Daily Market Color June 28, 2018Stocks Gain Alongside Surge in Oil Risk Assets Enjoy Break from Trade Concerns The risk-off mentality that has characterized financial markets over the past few weeks seemingly eased during today’s session. Major US stock indices posted gains between 0.4%-0.8%, as increases in financials (first winning session in the past 14) and tech outweighed a decline in the healthcare sector, which continues to feel the heat as Amazon enters the pharma market. US Treasurys experienced a mild selloff throughout the day, as yields/swap rates rose 1-2bps across the curve, with the 10-year note yield finishing near 2.84%. Commenting on the rates market earlier today, St. Louis Fed president James Bullard expressed caution with hiking the benchmark borrowing rate too aggressively, questioning that “the (FOMC) forecasts all have growth slowing…Should we be raising rates permanently in response to something that is only temporary?” Bullard was specifically referring to the recent growth related to fiscal policy, which is expected to diminish over the coming years. Oil Prices Continue to Rise Didn’t OPEC agree to boost production last Friday? Why have crude oil prices risen by 12% since then? In the winter of 2016, members of OPEC and other major oil producers around the world came to an agreement to curb production with the goal to rebalance the market and boost prices. The concern at the time was that the accord would not be able to generate the desired outcome. Fast forward to today, OPEC and its allies are now having issues with rebuilding the supply and putting a ceiling on energy prices. Last week’s meeting concluded with a plan to increase production by 1%, however external factors, such as the Iranian sanctions and a decline in Venezuelan capacity, have made the execution of that target near impossible. The US has done its part of the equation, increasing production to record highs, albeit stockpiles decreased by 9.9 million barrels this week (largest weekly drop in nearly two years). WTI crude futures touched as high as $74/barrel today – a level that hasn’t been seen since November 2014. GDP Revised Lower The Commerce Department’s third and final estimate of Q1 GDP growth missed expectations this morning, reported at +2.0% vs. 2.2% expected. Much of the weakness was attributed to consumer spending, which was revised down from 1% to 0.9% (estimate 1%) growth. The consumer spending figure, which accounts for about 70% of the US economy, was the lowest gain since 2013. There were also downward revisions to inventories and exports, while spending on business equipment and residential fixed investments were revised upward – perhaps reflecting some of the benefits of the new tax plan. Overall, today’s level represents the best first quarter GDP number since 2015, although it did not meet the lofty expectations of the Trump administration (3% sustained GDP growth). Fed Stress Test Qualitative Section Released This afternoon the Fed released the results of the second or qualitative portion of the Comprehensive Capital Analysis and Review (CCAR), more commonly known as the Fed Stress Test. After all banks passed the quantitative portion of CCAR last week the news was not as positive for several banks when today’s results were released. Deutsche Bank was the only bank to “Fail” the qualitative assessment on weakness in controls around the capital planning process, poor data capabilities and weak assumptions when predicting revenue. State Street was given a “Conditional Pass” due to losses the bank would incur if their largest counterparty was to default. State Street will not be required to adjust their capital return plan, but will be required to revise their management of counterparty risk going forward, especially how they analyze counterparty exposure in stressful scenarios. Goldman Sachs and Morgan Stanley both passed but were not allowed to increase the combined total amount of capital distributed to shareholders through dividends or buybacks, as returning that capital would have put their key capital ratios below the levels required under CCAR. From the Fed’s Statement “The Board issued a conditional non-objection to the capital plans of both Goldman Sachs and Morgan Stanley and both firms will maintain their capital distributions at the levels they paid in recent years, which will allow them to build capital over the next year.” Finally, four banks resubmitted their capital plans after the quantitative portion of the exam. The banks that took that “mulligan” included JP Morgan, American Express, KeyCorp and M&T. All other banks passed without need to revise any portion of their capital plan.