AFP

Large US banks reported a round of solid quarterly profits Friday, but cautioned of rising recession risks as the economy absorbs higher inflation and a dramatic shift is central bank policy.

JPMorgan Chase set aside $808 million in case of bad loans, while Citigroup reserved for $370 million in potential losses and Wells Fargo, $385 million.

These sums are much smaller than the reserves established at the start of the coronavirus pandemic. But they nonetheless point to a much changed environment from a year ago, when bank results were boosted by large releases of funds that had been set aside for loan defaults that did not materialize

Today’s litany of worries include stubborn inflation that has prompted significant central bank interest rate hikes; and geopolitical fallout from the Russian invasion of Ukraine, including uncertainty in the oil market and worries about European energy security this winter.

While the US consumer remains “very strong,” these obstacles elevate the risk of a downturn, said JPMorgan Chief Executive Jamie Dimon.

The end result could be “anywhere from a soft landing to a hard recession,” Dimon told reporters on a conference call. “If it is a hard recession, obviously it has implications for unemployment and business and reserves.”

Wells Fargo Chief Executive Charlie Scharf said the bank continues to see “historically low delinquencies,” but that it is “monitoring risks” tied to macroeconomic and geopolitical headwinds.

“While we do expect to see continued increases in delinquencies and ultimately credit losses,the timing is unclear,” Scarf said.

– Lower profits –

At JPMorgan, profits fell 17 percent to $9.7 billion on a 10 percent increase in revenues to $32.7 billion.

Higher interest rates helped boost the bank’s net interest income, but JPMorgan suffered a big drop in investment banking revenues in a period that has seen far fewer initial public offerings compared with a year ago..

Dimon said businesses “remain healthy,” but alluded to “significant headwinds immediately in front of us.” 

In an interview with CNBC earlier this week, Dimon said a US recession was likely in early-to-mid 2023 and that the stock market could fall another 20 percent.

At Citigroup, profits fell 25 percent to $3.5 billion, while revenues rose six percent of $18.5 billion.

Results were boosted by higher net interest income as well a gain from the sale of the bank’s Philippines business. These benefits were offset by lower revenues in investment banking and higher operating expenses. 

Citi opted to set aside reserves in light of rising recession risk. 

Under a “baseline” economic scenario, Citi sees unemployment rising to about four percent from the current 3.5 percent. Under a “downside” scenario, unemployment would be well above five percent, said Citi Chief Financial Officer Mark Mason on a conference call with journalists.

Even under a darker outcome, Mason said “I don’t think there’s a financial crisis coming anything close to the magnitude of what we’ve seen.”

At Wells Fargo, profits fell 31 percent to $3.5 billion, while revenues rose four percent to $19.5 billion.

Results were dented by $2 billion in fresh costs linked to “litigation, customer remediation and regulatory matters.” 

During a conference call with analysts, Scharf, who was named CEO in 2019 following a fake accounts scandal under earlier executive regimes, said the bank “still has open regulatory matters” related to earlier times and was looking to get past them “as quickly as we can.”

Near 1645 GMT, JPMorgan shares jumped 3.5 percent to $113.14, while Citi rose 1.4 percent to $43.56 and Wells Fargo gained 3.6 percent to $43.90

The pound fell on Friday after under-fire British Prime Minister Liz Truss sacked her finance minister and made a dramatic policy U-turn, while an equity rally ran out of steam.

The yen struck a new three-decade dollar low as a rise in US inflation expectations cemented expectations of more hefty Federal Reserve rate hikes.

Truss sacked finance minister Kwasi Kwarteng as pressure mounted on her government following last month’s big-spending, tax-slashing mini-budget, which spooked markets.

The September 23 budget sent the pound tumbling to a record dollar low, near parity with the greenback, and bond yields surged before stabilising thanks to interventions by the Bank of England. 

Sterling sank more than one percent to under $1.12 after Truss dismissed Kwarteng. 

It fell even lower after Truss appointed Jeremy Hunt as her new finance minister and announced a dramatic policy U-turn, before clawing back some of its losses.

In her first Downing Street press conference, Truss stated the “need to act now to reassure the markets”, abandoned her plans to eliminate an increase in corporation tax and said spending would not increase as rapidly as planned.

“The soap opera that is UK politics continues to dominate FX (forex) markets Friday,” said Stephen Innes, managing partner at SPI Asset Management.

UK 10-year government bond yields rose after the Bank of England publicly stated it would end its costly market interventions on Friday.

“Unfortunately for Truss, her swift ability to spook markets with a swathe of unfunded spending plans is now being followed by yet another rise in yields, as markets wonder whether we could soon see another push to replace her,” said Joshua Mahony, senior market analyst at online trading platform IG.

London’s FTSE 100 ended the day with a gain of 0.1 percent, having given up most of its earlier gains because Truss’s U-turn left her position fragile.

Berenberg bank Senior Economist Kallum Pickering said “the policy U-turn is a major humiliation for Truss” and weakens her politically.

“It is not easy to see how Truss –- whose personal mandate is now in tatters — can continue as PM for long,” he added.

While European markets ended higher, Wall Street failed to hold onto gains made on Thursday in a surprising rally despite data showing strong inflationary pressures in the United States.

A survey out on Friday showed inflation expectations were on the rise, a signal likely to worry policymakers at the US Federal Reserve, who are trying to not only tamp down inflation but ensure that expectations about price rises do not become entrenched.

“It is one report, but it coincides with a hot inflation report and a market that is fearful that it keeps mistiming when the Fed will pivot,” said Edward Moya at OANDA.

Expectations that the Fed will be able to quickly pivot — or begin reducing interest rates — helped spur a brief rally in stocks last week. 

Third quarter earnings season got into full swing, with a number of large banks, including JPMorgan Chase and Citigroup, reporting lower earnings and setting aside more funds in preparation for a possible recession, although their performances topped analyst estimates.

“None of those banks missed consensus earnings estimates, like investment bank Morgan Stanley did, yet their reports were laced with increased provisions for credit losses,” noted market analyst Patrick O’Hare at Briefing.com.

– Key figures around 1530 GMT –

New York – Dow: DOWN 0.4 percent at 29,915.75 points

EURO STOXX 50: UP 0.6 percent at 3,381.73

London – FTSE 100: UP 0.1 percent at 6,858.79 (close) 

Frankfurt – DAX: UP 0.7 percent at 12,437.81 (close)

Paris – CAC 40: UP 0.9 percent at 5,931.92 (close)

Tokyo – Nikkei 225: UP 3.3 percent at 27,090.76 (close)

Hong Kong – Hang Seng Index: UP 1.2 percent at 16,587.69 (close)

Shanghai – Composite: UP 1.8 percent at 3,071.99 (close)

Pound/dollar: DOWN at $1.1214 from $1.1326 Thursday

Dollar/yen: UP at 148.46 yen from 147.12 yen

Euro/dollar: DOWN at $0.9748 from $0.9776

Euro/pound: DOWN at 86.89 pence from 88.29 pence

Brent North Sea crude: DOWN 2.3 percent at $92.43 per barrel

West Texas Intermediate: DOWN 2.8 percent at $86.62 per barrel

burs-rl/gil

Grocery chain Kroger will acquire smaller rival Albertsons in a $24.6 billion transaction announced Friday that would create a supermarket giant but could face tough regulatory scrutiny.

The transaction, which unites two companies with some 710,000 employees and 5,000 stores in the United States, aims to take advantage of economies of scale to compete more effectively with giants like Walmart and Amazon.

But shares of both companies fell Friday as analysts cautioned that the transaction could face a tough once-over from Biden administration regulators, who have adopted a skeptical approach to large mergers.

In this case, both Kroger and Albertsons are consumer-facing companies. The deal also comes as the US economy contends with grinding inflation. 

In uniting, the two companies would have a combined customer base of about 85 million households, boosting its consumer data holdings and enabling some $1 billion in annual cost savings, executives said on a conference call with analysts.

These include “synergies” through improved sourcing, supply chain efficiencies and administrative savings, said Kroger Chief Financial Officer Gary Millerchip.

The companies pledged that the savings would enable them to “invest in lowering prices for customers,” they said in a press release.

But Morningstar analyst Zain Akbari predicted that the overlap between the companies in many markets would lead “regulators to scrutinize a transaction closely,” he said in a note earlier this week following reports of merger talks.

To address that issue, Albertsons plans to spin off between 100 and 375 stories as a standalone public company prior to the deal’s closing. 

This would create a “new, agile competitor” to the new Kroger, with a strong balance sheet and “experienced” management, Kroger and Albertsons said in a news release.

That transaction is expected to lower the deal cost by up to $4 billion to Kroger, the companies said. 

Near 1500 GMT, shares of Albertsons were down 7.1 percent at $26.59, while Kroger was down 3.2 percent at $45.06.

Elon Musk said Friday his company SpaceX wouldn’t be able to fund the Starlink satellite internet network over Ukraine indefinitely, amid reports he had asked the US military to cover the costs.

The move comes as Musk has been embroiled in public spats with Ukranian leaders who were angered by his controversial proposals for de-escalating the conflict, which included acknowledging Russian sovereignty over Crimea.

Starlink, a constellation of over 3,000 small satellites in low Earth orbit, has been vital to Ukraine’s war effort against Russia, with SpaceX donating some 25,000 ground terminals, according to an updated figure given by Musk last week.

In a series of tweets, the world’s richest man appeared to confirm a report by CNN saying he had written to the Pentagon warning that his financial contributions would come to an end, and that they would need to foot the bill.

“SpaceX is not asking to recoup past expenses, but also cannot fund the existing system indefinitely *and* send several thousand more terminals that have data usage up to 100X greater than typical households,” he tweeted. 

“This is unreasonable.”

Musk said the operation has already cost SpaceX $80 million and is projected to exceed $100 million by the end of the year.

But CNN said SpaceX figures shared with the Pentagon show about 85 percent of the first 20,000 terminals in Ukraine were paid at least in part by countries like the US, Poland, or other entities. 

They also paid for about 30 percent of internet connectivity.

– ‘Following his recommendation’ –

In overnight replies on Twitter on Friday, Musk expanded on the logistics of the operation. 

“In addition to terminals, we have to create, launch, maintain & replenish satellites & ground stations & pay telcos for access to Internet via gateways,” he said. 

“We’ve also had to defend against cyberattacks & jamming, which are getting harder. Burn is approaching ~$20M/month.”

Musk has recently been in a spat with Ukrainian officials including President Volodymyr Zelensky after suggesting a peace deal that involved re-running controversial referenda in Russian-occupied territories in Ukraine. 

Musk’s proposals were welcomed by Russia.

In response, Kyiv’s ambassador to Germany Andriy Melnyk weighed in, telling Musk to “fuck off.”

“We’re just following his recommendation,” Musk tweeted Friday, along with the shrug emoji.

According to CNN, SpaceX documents sent to the Pentagon said Ukraine had asked for 8,000 more Starlink terminals in July.

The Financial Times meanwhile has reported Starlink outages hit Ukrainian forces on the frontline, hindering their ability to liberate Russian-controlled areas in the east of the country, but the situation later improved.