Esperio: Banks and Air Carriers are Trying to Bail Out Markets

The major European stock indices, including Germany's Xetra Dax and France's CAC 40, have been trading neutral in the middle of the week gaining nearly 1.5%. The U.S. S&P 500 broad market indicator is close to March 2021 lows. Inflation fears are setting a strong negative sentiment, but the market is trying to rebound on hopes of further positive dynamics of the banking sector.

The U.S. Treasury 10-year bond yields touched the 3.0% psychological mark after a one-week pause, when the benchmark rates rolled back from their 42-month high at 3.203% to 2.815%.

This supported expectations of interest rate hikes on assets with guaranteed returns, which are accumulated in huge amounts in the global banking system, as well as additional chances of higher income being made by financial institutions from their loan portfolios. The Bank of America stocks, for example, bounced from monthly dips below $35 per share by 3.39%. Morgan Stanley gained 3.79%, while Citigroup even soared by 7.58% as it was further inspired after the Berkshire Hathaway foundation disclosed a $3 billion investments in it.

United Airlines jumped 7.88% after the Chicago-based air carrier holding said it raised its revenue forecasts per seat mile to the 23%-25% range compared with the same season of 2019, against its prior assessment of 17%. Last week, the company said this summer could become the busiest since the pandemic, at last, as nearly 5.3 million customers are going to fly with United during the Fourth of July Independence holiday period. In April, United Airline CEOs released high numbers of Q1 sales and forecasted the best quarterly revenue ever in April to June. American Airlines and Delta Airlines shares also edged up on this news.

Consumer retailers' reports, however, provided the consolidated market indicators with a negative impact, clearly spoiling the general sentiment. Walmart shares suddenly dropped by nearly 11.4% to $130 after Sam’s Club, the loyalty program dragged the operating margin down by 23%, as cheaper shopping for customers did not provide Walmart with as much profit as corporate seller.

As for the guidance for the rest of 2022, Walmart CEOs still bet for record sales, but with margins continuing to be below previous estimations. Earnings per share may remain flat or just slightly higher in the next quarter but the annual margin results may go into negative territory. This could be transitory, as the chain accumulated a broad and loyal customers' base and now may start to moderately raise prices instead of watching earnings deteriorate because of higher incoming and transportation costs. However, if the usually unsinkable Walmart is uncertain about similar issues highlighted in Target’s quarterly report it may diagnose more fundamental problems in the consumer behaviour of Americans.

Target’s profit was down by 50%. Its CEOs warned of even bigger margin hits due to rising freight costs. "These continue to grow almost on a daily basis and there is no sign right now... that it is going to abate over time," Target's chief executive Brian Cornell complained during a conference call. This is the best way to express the general concern about what is happening, despite good quarterly results from Home Depot or some other retailers, while global oil prices are approaching $115 per barrel of the Brent benchmark.

This article was written by Alex Boltyan, senior analyst of Esperio company.