Take Five: Banks, bottom lines, Brexit

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FILE PHOTO: A Wall Street sign is pictured outside the New York Stock Exchange, in New York City

(Reuters) – 1/BANKING ON RECOVERY

After U.S. Q2 results beat expectations, Q3 will show whether dire forecasts for companies’ bottom lines were justified.

Most sectors will again show steep drops in earnings but it should be less dramatic than the previous quarter; expectations are for an average 21% decline, versus the 31% contraction of Q2, when coronavirus-linked lockdowns decimated economic activity.

Energy companies are seen faring worst, with earnings down 115% from a year ago, according to Refinitiv. Tech earnings are predicted to fall just 0.5% percent.

Banks — Citi and JPMorgan report on Tuesday — may see earnings slip 19% on average but there is hope that after two quarters of hefty provisioning against bad loans, potential loan losses have mostly been covered.

(Graphic: Wall Street braces for lower earnings – https://fingfx.thomsonreuters.com/gfx/mkt/qzjvqnrdxpx/Pasted%20image%201602175244692.png)

2/WATCHING THE CURVES

Will the Fed do something about the Treasury yield curve?

Bets on a spending boost from any incoming administration — Democrat or Republican — has seen record shorts build up in long-dated Treasury futures and a jump in long yields has pushed the gap between five-year and 30-year borrowing costs to the widest since 2016.

Curve steepening isn’t bad news if it signals higher growth and inflation, yet for an economy recovering from recession, too quick a move is a threat and a headache for the Fed.

It hasn’t committed to capping yields or buying bonds of any particular maturity. But further steepening might test its patience. Fed research suggests bond holdings may need to rise another $3.5 trillion to boost the economy. Policymakers speaking in coming days will certainly be quizzed on that.

(Graphic: Steeper curve – https://fingfx.thomsonreuters.com/gfx/mkt/yxmvjbabgvr/Pasted%20image%201602156647472.png)

3/BREXIT ENDGAME?

With a UK-imposed Oct. 15 deadline for a post-Brexit EU trade deal upon us, there are signs a bare-bones agreement is taking shape. But is the endgame really in sight?

Negotiators warn of a huge amount of textual work even if a deal is struck. Another report suggests the EU is preparing for negotiations to last until mid-November. Several sticking points still remain.

The EU’s Oct. 15-16 summit will evaluate the progress. Sterling is on the rise meanwhile, but even if a deal is struck, the ebb and flow of Britain’s new relationship with the EU may continue to hold markets hostage.

(Graphic: Sterling and the ebb and flow of Brexit – https://fingfx.thomsonreuters.com/gfx/mkt/yxmpjbalkpr/GBPtheme0810.png)

4/SECOND WIND

China returns to work on Monday after a week of rest and, hopefully, recreation.

Policymakers and investors will have fresh trade and credit data to weigh up in coming days. But they will also scour railway bookings, box office sales and petrol usage to gauge how consumers spent during vacation. With consumption is still a soft spot in an otherwise remarkable post-COVID rebound, a spending leap could offer a second wind for the economy.

One early indicator might be traffic. Back at last year’s levels for the first time since the outbreak, it’s a hint that Chinese travellers are out and about, but preferring private transport.

(Graphic: China city congestion – https://fingfx.thomsonreuters.com/gfx/mkt/xegpbjryrpq/Pasted%20image%201602143342170.png)

5/VIRTUAL IMF

Each year, up to 10,000 policymakers, business people, NGOs and journalists congregate in downtown Washington for the semi-annual IMF/World Bank shindigs. This year, meetings are virtual but there is still pressing business at hand.

More than 100 countries have requested IMF help; demand for support could reach $100 billion. One issue is a possible extension of the G20’s Debt Service Suspension Initiative (DSSI) for poor countries. Extending that by six months would provide another $6.4 billion of relief, rising to $11.4 billion if it runs to end-2021.

But amid warnings 100 million people could fall into extreme poverty, World Bank President David Malpass wants banks and investors to also provide relief to DSSI countries. He may face opposition, with many arguing of defaults that could bar countries from borrowing for years to come.

(Graphic: How much debt relief will DSSI provide countries – https://fingfx.thomsonreuters.com/gfx/mkt/xklpyqjbwpg/Pasted%20image%201601420726673.png)

(Reporting by Sujata Rao, Dhara Ranasinghe and Marc Jones in London; Tom Westbrook in Singapore and Ira Iosebashvili in New York; Editing by Catherine Evans)

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