Evergrande Panic Comes Just in Time for Big Banks
(Bloomberg Opinion) -- Morgan Stanley strategists led by Michael Wilson warned on Monday that a 20% drop in the S&P 500 Index was a growing risk. Two weeks ago, Goldman Sachs Group Inc. analysts said investors shouldn’t assume low volatility will last.
Left unsaid: These two U.S. banks stand to benefit more than any others should those forecasts come to fruition.
Wall Street’s biggest institutions are in the final days of a quarter that many expect will show a sharp decline in trading revenue relative to the three months through June. Bloomberg Intelligence estimates that Bank of America Corp., Citigroup Inc., Goldman, JPMorgan Chase & Co. and Morgan Stanley will collectively experience a 21% drop in equities trading revenue relative to the previous quarter, while money made from fixed income, currencies and commodities will fall 7% quarter-over-quarter and 18% from a year earlier.
This is a particularly painful reality for Goldman and Morgan Stanley, where trading made up 47% and 39% of overall revenue in 2020, respectively. Both banks have aimed to reduce their dependence on market swings to generate profits — Morgan Stanley acquired Eaton Vance Corp. to bolster its asset-management business, while Goldman said this month that it would buy GreenSky Inc. to add a buy-now, pay-later program to its Marcus consumer-banking platform. Still, those efforts don’t change the short-term reality that trading stocks and bonds drives performance at these two white-shoe investment banks.
Traders had any number of reasons to be busy on Monday. The S&P 500 fell 1.6% at the open and is on pace for the biggest decline since May. The VIX Index shot up to about 25, indicating the highest volatility in more than four months. Bloomberg News reported that at least eight companies that had been considering borrowing through the U.S. investment-grade debt market were likely to pull back, given the sudden move higher in cost to insure against bond defaults.
Of course, the reason for the sudden price swings is clear and understandable. The prospect of the crisis at indebted developer China Evergrande Group no longer being contained lets imaginations run wild about possible contagion risks in the world’s second-largest economy and across the globe. Combine that with the feeling that investors are overly exposed to American stocks — as evidenced by the $46 billion that flowed into U.S. equity funds in the week through Sept. 15, the most since March — and that the Federal Reserve can’t do much of anything to directly resolve this problem, and it’s easy to see why warnings of a looming correction start to resonate. Especially after the S&P 500 has gone 219 trading sessions without closing below its 50-day moving average twice in a row, the longest such streak since 1996. It’s hard to shake the feeling that something had to give.
No one can know for sure what will happen with Evergrande, especially after China has shown disinterest in propping up financial markets in recent months with crackdowns on everything from large technology firms to for-profit tutoring companies. But my Bloomberg Opinion colleague Shuli Ren posits that concerns about financial contagion are misplaced, given that China will want to ensure the stability of its banking sector through a slow and gradual unwind of Evergrande. That certainly seems plausible, if less headline-grabbing than doom-and-gloom predictions or comparisons to the implosion of Long-Term Capital Management.
In the meantime, while stateside investors rush to get a grasp on what’s happening on the ground in China, Wall Street will happily help them trade in and out of positions to prepare for any potential fallout. Should contagion fears continue to grip global markets — and especially if they prove unfounded — these final days of the third quarter will likely be a boon to banks’ bottom lines.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Brian Chappatta is a Bloomberg Opinion columnist covering debt markets. He previously covered bonds for Bloomberg News. He is also a CFA charterholder.
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