Does Wall Street Know Something About Bank of America That You Dont?

By Markets Fool.com


Is Wall Street talking behind your back again? Image source: iStock/Thinkstock.

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It makes sense that Bank of America's shares are on the move today, but it's interesting that they're up 2.6% so early in the trading day on Thursday. I say that because we don't yet know how two pending catalysts for its stock will turn out.

The first major catalyst is the unfolding referendum in the United Kingdom over whether to secede from the European Union. It's a shortsighted, irrational measure fueled by anti-immigration sentiment.Known as Brexit, the move could have a big impact on not only the U.K. and EU, but also on the global economy. This is because the euro is one of three major reserve currencies in the world, along with the U.S. dollar and the Japanese yen. Britain's departure alone wouldn't signal the euro's demise. But that's the logical endpoint if other countries follow suit.

For Bank of America, a vote in favor of Brexit would mean that it would have to relocate some of its London-based bankers to the continent, according to Keefe, Bruyette & Woods, an investment bank specializing in the financial services sector. It would also likely spur heightened volatility in credit markets, which could weigh on Bank of America's sales and trading revenue.

The latest polls show that U.K. voters are split evenly on the issue. This is despite the fact that a nationalist Brexit sympathizer last week assassinated a politician who was urging people to vote in favor of remaining in the union. Thus, given that stocks are up ahead of the results, one would be excused for concluding that investors believe U.K. voters will read between the lines and reject the spurious rationale offered in favor of leaving. We'll find out for sure this evening or tomorrow morning.

How the other catalyst unfolds is also unknown at this point. It relates to Bank of America's performance on the 2016 stress test -- or, more specifically, on the first of two portions of the test, the results of which will be announced by the Federal Reserve at 4:30 p.m. EDT today.

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The purpose of the stress test is to determine whether the nation's biggest banks, those with more than $50 billion in assets on their balance sheets, have enough capital to survive an economic downturn akin to the financial crisis. Additionally, the second part of the stress test, the comprehensive capital analysis and review, dictates whether a bank can raise its dividend or increase its share repurchase program. The results from this part are due next Wednesday, June 29.

While there are thus plenty of reasons for Bank of America's shares to be on the move right now, it's premature to know if they're headed in the right direction. That said, given that the S&P 500 is currently up by almost 1%, and that Bank of America has a beta of 1.73 (according to YCharts.com), which implies that its stock is 73% more volatile than the broader market on a typical day, the most likely explanation for the rise in the bank's shares is that investors overall are feeling optimistic about how one or both of these events will play out.

We'll know soon enough either way.

The article Does Wall Street Know Something About Bank of America That You Dont? originally appeared on Fool.com.

John Maxfield owns shares of Bank of America. The Motley Fool recommends Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.