Tomorrow a slew of bank earnings officially launch Q3 earnings season, and as UBS desk trader Jim Everett writes, for the first time this week, the desk turned better for sale in financials (banks specifically): "a combination of Hedge Funds and Long Onlys but it really feels more like position tweaking in front of earnings tomorrow as the real bets have probably been laid at this point." As Everett adds, "news was light, the sector is mostly reacting to macro but there is clearly a bit more of a bid to the larger money centers versus regionals. Everything that reports on Friday matters, but it seems like Bank of America may be the most watched this time around (others reporting: PNC Financial, JPMorgan, Wells Fargo, BlackRock, Citigroup)."
The selling is probably not surprising: a few days ago, Goldman bank trader Sarah Cha sent around a chart from the bank's prime brokerage showing that US Bank L/S ratio had consistently crept higher since end of July (now 1.1 from 0.8) and the color from PB was that long buys had outpaced short covers 2:1. To be sure, there is only so much selling one of the year's worst performing sectors can take.
While that caught many by surprise, Cha said that it is more rare these days to get an inbound of someone who thinks banks are a high conviction short here: "More often than not we hear that its tough to be short banks here and that they expect many mgmt. teams to say that the worst is behind us and things aren’t that bad right now."
