Banking & Finance

Big Banks Rising Again on Belief in More Central Bank Action (BAC, C, GS, JPM, MS, WFC, AIG, AXP)

The country’s largest financial institutions are having another good day today, despite the announcement by the European Central Bank (ECB) early this morning that it would not be lowering interest rates. Shares of Bank of America Corp. (NYSE: BAC) are up 7.3%, Citigroup Inc. (NYSE: C) is up 4.3%, Goldman Sachs Group Inc. (NYSE: GS) is up 2.8%, JPMorgan Chase & Co. (NYSE: JPM) is up 3%, Morgan Stanley (NYSE: MS) is up 5.2%, Wells Fargo & Co. (NYSE: WFC) is up 1.3%, American International Group Inc. (NYSE: AIG) is up more than 4%, and American Express Co. (NYSE: AXP) is up 2.2%.

The decision by the ECB not to lower rates was accompanied by a statement from Mario Draghi, the bank’s managing director, that there were votes to lower rates and that has lifted hopes for more aggressive action by the ECB in days to come.

Slowing growth in the US economy is also raising hopes for additional economic stimulus by the Federal Reserve. The Fed can’t cut interest rates any further, but it could increase its purchases of Treasuries, expand its “Operation Twist” exchanges, or, as more have come to expect, another full-blown round of quantitative easing, QE3. Pumping more money into the world’s largest economy would be a very good thing for the country’s largest banks.

The next FOMC meeting is scheduled for June 19-20, so we have a couple of more weeks to wait for any significant action on this side of the Atlantic. However, the Bank of England’s monetary policy committee meets tomorrow and is expected to leave interest rates at 0.5% and withhold further easing in the UK economy. But the pressure is building in the UK, too, for more easing and some observers even think the BoE could lower interest rates to 0.25% as a signal that it will do whatever it takes to protect the UK from the crisis in the Eurozone.

Central banks and policy makers will more and more determine the direction of the big financial institutions’ share prices. That’s not a good place for the global economy to find itself in.

Paul Ausick