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Against Tide of Bad Banking News, Stocks Tick Up Slightly

A surprising last-minute jump in the Dow Jones sparked a mini-rally to end Tuesday’s mostly boring trading session.

MANHATTAN (CN) — As mostly dismal bank earnings began to roll in Tuesday, markets flatlined before finishing the day on last-minute gains. 

Unlike Monday, when markets started strong but then fizzled out, for most of the day on Tuesday the three major indices were relatively flat. In the two final hours of trading, however, the Dow Jones Industrial Average shot up 557 points, a 2.1% increase. The S&P 500 and Nasdaq had similar late-day runs, gaining 1.3% and 0.9%, respectively.  

Investors and analysts spent most of the day combing through the first batch of earnings reports from major banks. 

By far the worst of the bunch was Wells Fargo, which reported a $2.4 billion loss last quarter. The bank’s revenue dropped $3.8 billion year over year, and it noted it set aside $8.4 billion in reserves to handle future disruptions.

Wells Fargo has been under the yoke of the Federal Reserve since 2016, after it was revealed some of the bank’s employees had created fake customer accounts. The Federal Reserve capped Wells Fargo’s asset growth, and the bank has faced a number of fines and other regulatory constraints.

Wells Fargo also does not have a major presence on Wall Street, without a large investment bank sector to help keep it busy during the lockdown. 

On the flip side, JPMorgan Chase reported a record-high increase in revenue, showing $33.8 billion in managed revenue during the second quarter, mostly due to the 44% in the investment and corporate banking sides of the firm’s business.

The bank also said it serviced $28 billion worth of small-business loans under the government’s Paycheck Protection Program. 

Chase has set aside nearly $9 billion in additional reserves to offset load defaults in its operations due to the recession. “We are prepared for all eventualities as our fortress balance sheet allows us to remain a port in the storm,” CEO Jamie Dimon said in a statement.

Citigroup also largely did better than expected, posting $19.7 billion in revenue last quarter. The bank’s net income dropped, however, from $4.8 billion during Q2 2019 to $1.3 billion in Q2 2020.

CEO Michael Corbat said the bank’s institutional clients group helped prop up overall revenues. “We continued to add to our substantial levels of liquidity and our balance sheet as plenty of capacity to serve our clients,” he said, noting that the bank’s consumer banking division fell about 10% year over year.

Banks were able to partially weather the Covid-19 storm during the first quarter and seem to have adequate reserves in place. Additionally, many banks were able to rope in fees from servicing hundreds of billions of dollars in loans to small businesses through the Paycheck Protection Program.

On Wednesday, Bank of New York Mellon, Goldman Sachs and U.S. Bancorp will announce Q2 earnings, while Morgan Stanley and Bank of America are expected to release their earnings on Thursday.

Apart from the financial services industry, airlines began to release earnings this week. Delta Ai Lines revealed it lost about $2.8 billion in net income last quarter, as well as a whopping 91% decrease in net revenue versus Q2 2019. The company has been able to raise an additional $11 billion in liquidity during the last quarter, keeping it afloat.

Things are not likely to improve much during the third quarter, the company predicts. “We expect to see a similar 50% year-over-year reduction in the September quarter despite a sequential increase in capacity, reflecting the increased variability we have achieved in our cost structure,” Delta CFO Paul Jacobson said in a statement.

Investors were able to rely on some good news early in the day from the National Federation of Independent Business, whose June optimism index rose from 94.4 to 100.6, the highest it’s been since February. Most measures of the index, including job openings and plans to increase employment, increased last month.

“We’re starting to see positive signs of increased consumer spending, but there is still much work to be done to get back to pre-crisis levels,” NFIB chief economist Bill Dunkelberg said in a statement.

Of course, getting back to pre-crisis economic levels also may depend on Congress, which is currently debating a fourth stimulus package.

“Even if the virus spread flattens, the recovery is likely to face headwinds,” Federal Reserve Governor Lael Brainard warned Tuesday in a speech before the National Association of Business Economics.

“While it is welcome news that 7.5 million jobs were added in the past two months, it is critical to stay the course in light of the remaining 14.7 million job losses that have not been restored since the Covid crisis started,” she said. She added that “the strength of the recovery will depend importantly on the timing, magnitude, and distribution of additional fiscal support.”

In total, more than 13.1 million people have been infected by Covid-19 worldwide, while about 575,000 have died, according to data compiled by Johns Hopkins University. In the United States, nearly 3.4 million people have contracted Covid-19, while nearly 136,000 have died.

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