What’s Happening: The Federal Reserve will require all large banks to suspend share buybacks in the third quarter and limit shareholder dividends to the amount paid in the second quarter, moves aimed at preserving capital, my colleague reports from CNN Business, Anneken Tappe.
All major banks will also have to resubmit their capital plans later this year to reflect the impact of the coronavirus.
“The banking system has been a source of strength during this crisis,” Vice President Randal Quarles said in a statement. The goal, then, is to keep it that way.
The Federal Reserve announcement accompanied its annual stress test, a post-Great Recession effort that goes through adverse scenarios to ensure the health of the banking system.
This year, the Fed also tested how banks would fare in three different recession scenarios: a V-shaped, U-shaped, and W-shaped recession and recovery. The central bank found that, in its most severe scenarios , bad loan losses would range from $ 560 billion to $ 700 billion. It did not disclose results by individual bank.
What it means: The Fed said that even in the most extreme circumstances examined, banks “could continue to lend to businesses and households, due to substantial capital accumulation since the financial crisis.” Still, there is enough ambiguity about the economic outlook for the central bank to feel it needs to step in.
Some think the Fed should have gone further, banning dividends directly.
See here: “The banking system will face increasing stress as the pandemic and related economic disruption continues, and businesses and households face challenges in meeting their financial obligations,” said Democratic Senators Elizabeth Warren, Sherrod Brown and Brian. Schatz in a letter to Quarles and Fed President Jerome Powell this week. “Now is the time to suspend capital distributions across the board to strengthen the loss absorbing capacity of the big banks.”
One of the Fed’s governors, Lael Brainard, who was confirmed by President Barack Obama, also opposed the fact that banks can continue to pay shareholders.
Investor Insight: The KBW Bank Index rose 3.3% on Thursday after financial regulators said Thursday that they plan to make it easier for banks to invest in venture capital funds and relax some limitations on derivatives trading. But stocks fell after hours after the Fed’s announcement.
Biotech IPOs are booming. It’s not just about Covid-19
Healthcare companies and governments are competing to find a vaccine or other effective treatment for Covid-19, so investors have been piling up stocks like Gilead Sciences, Moderna and Novavax.
Shares of Forma Therapeutics, which is developing drugs for hematologic diseases and cancers, have more than doubled since it went public on June 18.
Avidity Biosciences, which has gained nearly 60% since its debut in mid-June, is working on muscle disorders. And Pliant Therapeutics, which focuses on fibrosis, has increased more than 90% since going public in early June.
Research firm IPO Renaissance Capital said in a report this week that two-thirds of companies listed in the second quarter were in the biotech sector.
So what does it matter? Analysts say biotech companies are benefiting from the overall market recovery, as well as new interest in health care as the industry makes headlines.
“Pharmaceutical and biotech IPOs are particularly well,” said Philip Lawlor, managing director of global markets research at FTSE Russell. “That is due in part to Covid-19, but also to the defensive nature of the healthcare sector.”
Investor Info: SPDR S&P Biotech ETF has risen 20% this year.
Nike’s surprise loss and the future of retail
The details: Nike recorded a 75% increase in digital sales. But that failed to offset the closing of stores around the world and a collapse in the company’s wholesale business, through which Nike sells its products to other retailers.
Nike said wholesale shipments decreased nearly 50%, increasing inventory by more than 30% from a year ago.
In China, where all of the company’s stores are open again, there are signs of improvement. Revenue in the Greater China region fell 3%, while revenue in North America and Europe, the Middle East and Africa plunged 46%.
Investor insight: Shares fell 3% in pre-trade.
Nike is in much better shape than many of its competitors. But the results show how much physical stores matter, even to the best players in the industry who have invested heavily in their online presence.
Until next time
US personal income and expense data arrives at 8:30 am ET.
Coming next week: The US employment report for June is expected to show continued improvement in the job market, reducing the unemployment rate to 12.2%.
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