Banks Say They Aren’t Cashing In on This Market Turmoil
(Bloomberg) -- Financial-market turbulence is supposed to be a good thing for Wall Street trading desks -- not so this quarter.
Banks are struggling to capitalize on tumult across stock, bond and currency markets, in part because many investors are staying on the sidelines as year-end approaches.
Another culprit: dramatic but short-lived swings in asset prices that are striking some of their clients hard, while also making riskier bets even more treacherous. Citigroup Inc. faces losses of as much as $180 million on loans to an Asian hedge fund, and Natixis SA took a 260 million-euro ($296 million) hit this quarter from equity-derivatives trades.
“On trading, sometimes volatility is good; sometimes volatility is bad,” Jamie Dimon, JPMorgan Chase & Co.’s chief executive officer, said at an investor conference this month. Recent gyrations were spurred by trade tensions, China selling U.S. Treasuries, the reversal of central-bank stimulus and political concerns relating to Brexit and Italy, Dimon said.
Bank investors could be forgiven for having deja vu. Wall Street firms have often bemoaned the lack of market swings, only to say the volatility is too extreme once it arrives. Still, this environment is fairly rare: the Cboe Volatility Index, or VIX, on Thursday closed at its highest level in more than 10 months. Similar gauges for U.S. Treasuries and currencies rose to their highest monthly averages in nine months and three months, respectively.
The past few weeks have been so tumultuous that Bank of America Corp. CEO Brian Moynihan this week walked back previous optimism, saying the bank now expects trading revenue to fall “a few percentage points” after earlier this month forecasting a slight increase.
At JPMorgan, fourth-quarter trading revenue is on track to be “roughly equivalent” to the same period a year ago, Dimon said Dec. 4. And Citigroup’s combined fixed-income and equity revenue is likely to be “slightly lower” than last year because volatility hasn’t boosted activity as much as the bank had hoped, particularly in Group of 10 rates trading, according to Chief Financial Officer John Gerspach.
Bank stocks have fallen roughly 20 percent this quarter, even more than the 15 percent slide in the broader equity market. The slump comes as investors weigh whether lenders’ earnings have peaked, while market participants shift their focus toward predicting the next economic downturn. Hedge funds, which banks service through their trading desks, are on pace for their worst year since 2011.
“You’ve seen the buy-side generally take down risk into the end of the year,” said Jason Goldberg, an analyst at Barclays Plc. Increased volatility and risk-off sentiment have spurred trading volumes, but that activity hasn’t given banks much of a revenue boost because it’s concentrated in lower-margin areas such as equities, he said.
Still, the doldrums probably won’t be enough to derail what was a “sound year” for trading at the five biggest U.S. banks, according to Goldberg. He estimates they’ll generate a combined $78 billion in trading revenue in 2018, the most since 2016, thanks to a stronger first half of the year.
Buckingham Research Group is less optimistic. It expects trading in fixed income, currencies and commodities to be a drag on banks’ fourth-quarter markets revenue as “widening credit spreads and flight to safety likely weighed on market making,” analyst James Mitchell wrote in a note.
For traders, profits may have fallen short of expectations as they overestimated the potential for a sustained surge in volatility, which wasn’t matched by actual price swings. In currencies, for example, one-month implied volatility for the dollar-yen exchange rate surged to an almost four-week high Thursday, while realized volatility languished near the lowest since January.
The uncertainty gripping markets is going to keep activity muted through the end of the year, leading to disappointment for banks hoping for a flurry of activity, according to Fitch Ratings.
“If you’re a money manager, you’ve got your returns locked in -- you don’t really want to do anything in December so you might just back off, particularly if markets are looking really choppy,” said Christopher Wolfe, head of North American banks at Fitch. “You want Goldilocks volatility. You need some, but too much pushes people off to the sidelines.”
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