US Banks see potential weakness as Fed caps dividends and bans buybacks – 26 June

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US Banks see potential weakness as Fed caps dividends and bans buybacks

26 June 2020

After US markets closed in the wee hours of 26th June, the Federal Reserve (Fed) informed the biggest names in the US banking industry that there will not be able to increase dividends or resume share buybacks, through the third quarter this year at least.  The uncertainty over the course the Covid-19 global pandemic was named as the key reason for this implementation, and in turn has casted a somber outlook for the banking sector in the US.

With this latest development, it appears that there will be little near-term catalyst imminent for US banks. As the announcement was made after markets closed, it is likely that US banks could face pressure when markets open later, as they have yet to factor this news in. Although there was optimism last night due to the easing of the Volcker rule, where US banks are now able to increase their investment amount in riskier assets, the Fed’s latest implementation would serve as a pessimistic gauge in its outlook for the US banking industry. Hence, downside risks still prevail, as the end to Covid-19 still appears distant.

For now, Wells Fargo & Co., Goldman Sachs Group Inc. and Morgan Stanley may be more affected. Wells Fargo saw its profit slump 89% in the first quarter, and could be most at risk for a dividend cut after this announcement. Meanwhile, Goldman and Morgan Stanley reportedly fared the worst among US-based banks, and are expected to fare worse than other banks due to their reliance on capital markets.

Technical Outlook (Powered by Trading Central):

US Banks Chart

Wells Fargo ST: Our Pivot point stands at 30.1.

Our Preference: Eye 20.2

Alternative Scenario: The upside breakout of 30.1 would call for 33.5 and 35.5.

Comment: The RSI is below 50. The MACD is below its signal line and negative. The configuration is negative. Morever, the stock is below its 20 day MA (28.47) but above its 50 day MA (26.96)

Goldman Sachs ST: Our pivot point is 183.4

Our Preference: As long as 183.4 is support, look for 241.2

Alternative Scenario: Below 183.4, expect 165.4 and 154.5

Comment: The RSI is above 50. The MACD is positive and below its signal line. The stock could retrace in the short term. Moreover, the stock is above its 20 and 50 day MA (Respectively at 206.65 and 190.97)

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