America’s largest banks and their shareholders were quick to celebrate a recovery in trading revenues over the past year. But they may have spoken too soon.
Wall Street vets know they can’t fight the Fed – especially with the ostensibly “data-dependent” central bank committing to returning the Fed funds rate to 3% over the next two years. But with the arrival of the summer doldrums ushering in low trading volumes across markets, traders are acknowledging that they can’t fight the seasons, either.
“After four straight quarters of rising income from trading, the biggest U.S. investment banks spent the past few months in a renewed slump. Shareholders will soon see how dull it’s been. Analysts estimate the five largest firms will say their combined revenue from trading dropped 11 percent from a year earlier to $18.4 billion -- the smallest haul for a second quarter since 2012. The banks start posting results July 1.”
Many Wall Street traders are opting to wait out the summer slowdown, focusing on their families, or their online dating profiles, instead of desperately trying to drum up business.
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Indeed, one bond trader who spoke with Bloomberg said he’s been slipping out early to watch his kids play sports. A fund manager says his office just staged a golf retreat. And a trading supervisor at another bank confided that he’s spending more time swiping through potential romantic partners on the dating app Tinder.
"Among the hardest hit are fixed-income traders. Five investment banks – Bank of America’s Merrill Lynch, Goldman Sachs, J.P. Morgan Chase & Co., Citigroup and Morgan Stanley - are likely to see revenue from that business fall 16 percent to $11.2 billion, according to estimates gathered from nine analysts. At Goldman Sachs Group Inc., it probably tumbled 23 percent to about $1.5 billion, the estimates show. At JPMorgan Chase & Co., it likely fell 17 percent to $3.3 billion."
If these forecasts are accurate, the declines would represent the smallest haul for a second quarter since 2012. The banks start posting results July 1.
"But fixed-income trading isn’t the only area where banks are expecting a pullback: In equities trading, analysts estimate total revenue slipped 2 percent to $7.2 billion. Stock-trading leader Morgan Stanley may post the sharpest decline, about 6 percent."
Traders are grousing about a lack of market-moving news. Congressional gridlock is eroding optimism that President Donald Trump can enact a sweeping, pro-business agenda. Other geopolitical frictions have yet to jolt markets.
And while bank CEOs probably wish they could chain their clients and counterparties to their desks to keep them trading at all costs, the leaders of the biggest banks have been priming the market to expect a second-quarter slowdown in trading profits.
“Bank leaders began tamping down expectations at investor conferences six weeks ago. JPMorgan Chief Financial Officer Marianne Lake delivered the first warning, telling investors trading revenue was down roughly 15 percent in the quarter’s initial two months, hurt most by fixed-income trading. Equities held up better, she said, especially in derivatives and among units that cater to hedge funds.
Trading results are closely watched. The business generates about 25 percent of total revenue at the five banks and tends to be their most volatile major business. And to be sure, analysts -- often drawing on banks’ own commentary -- usually underestimate results. Citigroup Inc.’s net income, for example, has beaten their average estimate for 13 straight quarters. This time, the depth of a trading dip may be curtailed by an expected boost in lending fees.
That same day, Bank of America Corp. Chief Executive Officer Brian Moynihan added to investors’ dismay by revealing his firm’s trading decline would probably be between 10 percent and 12 percent. Both executives blamed diminished client activity and low volatility. Citigroup CEO Michael Corbat soon echoed the prognosis, saying his firm is ‘right in line.’”
Corporate-bond trading is also expected to take a hit, though the size of the drop has been distorted by an exceptionally strong first-quarter.
“Altogether, corporate-bond trading volume on Wall Street dropped 13 percent in the second quarter to $1.14 trillion compared with the first quarter, according to data compiled by Bloomberg. And in equities, the VIX Index, a closely watched measure of volatility developed in the 1990s, dropped to its lowest level in more than 23 years.”
To be sure, some of the slowdown is also a matter of perception. As the drama of President Donald Trump’s first months in office – characterized by battles over the president’s legislative agenda, escalating tensions with North Korea and investigations into both Trump’s inner circle and Democratic stalwarts like former AG Loretta Lynch and Berne and Jane Sanders – gives way to the slowing summertime newsflow, traders are more cognizant of the slowdown this year.
“One bank trader said the quarter felt particularly dull because of the months-long crescendo of activity that led up to it. Britain’s vote to exit the European Union jolted markets last June. Trump’s election victory in November extended the run.
But in the second quarter, the flurry subsided. The slowdown soon began to chip away at the so-called Trump Bump that once boosted bank stocks. Investors are concerned the president and his Republican allies may struggle to enact policies to help big Wall Street banks.”
But excitement promises to make a comeback in the third quarter, as the battle over raising the debt ceiling looks poised to rattle markets, while traders are also waiting with bated breath to see if Trump can enact his proposals to repeal and replace Obamacare, as well as what’s shaping up to be the most sweepinof g tax reform agenda since the 1980s.
“What’s frustrating people more than anything is the lack of movement,” said Thomas Roth, head Treasury trading at MUFG Securities Americas Inc. At this point, traders need a major overhaul of U.S. regulations, a significant shift in fiscal or monetary policy, or some other surprise to trigger sustained investor action, he said.”
And yet, there’s also the possibility of a summer surprise that could shake the market out of its sense of complacency and cause trading volumes to skyrocket. Last year, we had Brexit. The year before, it was China's decision to devalue the yuan. The only question is, what will it be this year? An armed conflict with North Korea? Or perhaps a de-escalation and diplomatic resolution? Will we see a sudden breakthrough on Trump’s legislative agenda? Looking further afield, maybe the long-awaited Chinese debt implosion will finally arrive? Or perhaps the US subprime auto-loan market will topple over like a house of cards.
“Something always blows up over summer,” he said. “We’ve seen it for many years.”
In the meantime, traders should probably appreciate the downtime while they have it, because once their kids head back to school and the news cycle picks up, they might not have another moment to breath until the holidays.
“As a salesman or trader, it does get to the stage where you go, ‘Christ, what am I going to do for the rest of the day?’” said Chris Wheeler, a bank analyst at Atlantic Equities. “I don’t think anyone is going to be that keen to be on the desk when it’s so quiet. The danger is people get quite bored.”