Wall Street has hit a low - and things can (probably) only get better from here
-3.jp2)
Choppy trading conditions, fears over China's growth and a collapsed oil price combined to create a "perfect storm," putting banks in serious difficulty.
Morgan Stanley, JPMorgan and Citigroup have all sounded the alarm. Markets revenues are going to be down 40% to 45% at Credit Suisse. Corporate bond trading has been especially challenging.
Bank stocks hit a low in mid-February, with Goldman Sachs' share price sinking to a 12-month low on February 11.
Amid all that gloom, though, there are a few signs of optimism. Maybe, just maybe, Wall Street has hit a low, and conditions can only get better from here.
Here is Goldman Sachs analysts Richard Ramsden (emphasis ours):
While the 1Q decline has likely been digested by the market (given intra-quarter guidance), we believe that there could be downside risk to consensus FY EPS should we see normal seasonality of -10-15% QoQ for the rest of the year (implying -23% YoY fall in trading revenues). Assuming banks offset much of this headwind with expense reductions, this would imply ~3% downside to our 2016E EPS (we assume a margin consistent with 1Q16E IB margin). That said, we view normal seasonal declines from 1Q levels as an unlikely scenario given the pick-up in activity in the back half of the quarter and the abnormally weak revenue picture in 1Q16 (weakest core 1Q in a decade).
That echoed analysts elsewhere. Matt O'Connor at Deutsche Bank said in a note this week for example that he sensed "activity levels have improved somewhat in March."
Money has been moving in to higher yielding, riskier assets. High-yield credit funds have had five consecutive weeks of inflows, according to Bank of America Merrill lynch, while emerging market debt funds enjoyed their big inflows since June 2014 last week. Money market funds, seen as a safe haven, haven seen five weeks of outflows.
Trading executives confirm the hypothesis, telling Business Insider that market conditions flipped from "bad volatility" in February to "good volatility" through March. This distinction is an important one, as it marks the difference between trading conditions that are so volatile that activity drops off a cliff, and markets that are moving enough to spur activity, but not so much that people freak out and run for cover.
Investment bank Jefferies alluded to this when it reported result for the three months ending February 29. Jefferies executive said then:
While we are early in the second quarter and one can never predict the future, it appears markets have not only stabilized, but aggressively snapped back. Bank holding company stocks in the US and globally have halted their sell-off, high yield inflows have been at record levels, hedge funds appear to have stabilized, equity markets have rebounded, and energy/commodity prices have improved significantly.
This pick-up has helped boost revenues after a horrible first two months to the year, according to industry executives.
The question is: by how much, and are the new, improved trading conditions just a temporary blip in an otherwise disastrous year?
Wall Street executives are hoping the better environment is here to stay.