Despite a near record surge in the S&P500 in the first quarter accompanied by a plunge in volatility after a harrowing fourth quarter 2018, it was a dismal quarter for bank FICC trading revenues. Q2, which was diametrically opposite and where the market rose even more before sliding, and volatility finally awoke, is set to be... even worse.
Speaking at an industry conference in NYC on Monday, Morgan Stanley CEO, James Gorman, said that "the last two weeks have been quite hard. Up until then, it was solid. We’re not going to have a bad quarter in the securities business, but you’ve got to be realistic with the environment." Morgan Stanley’s generated $5.2 billion in institutional revenue in Q1, so despite the drop, the business is still likely to easily exceed $4 billion in revenue this quarter as its stability has increased in recent years, he said.
Despite the warnings, Gorman said he’s "highly confident" Morgan Stanley will reach or surpass $4 billion to $5 billion in fixed-income trading revenue this year, even though he is troubled by the tone taken by the U.S. and China in their trade dispute, noting that a full-on trade war could push the U.S. into a recession.
But it wasn't just sales and trading - investment banking was also hit. Quoted by Bloomberg, Gorman said that macro trading was especially “challenged,” but merger activity was also “lumpy.” Speaking at the same conference, Citigroup CFO Mark Mason similarly warned that revenues will disappoint, warning that second-quarter fixed-income and equities trading revenue will likely fall by a percentage in the "mid-single-digit range" from a year ago, while IB fees are expected to slump by a percentage in the "mid-teens."
“We certainly saw a slowdown in the first quarter coming out of December where there was low volatility and heightened uncertainty,” Mason said Tuesday. “Frankly, that slowdown has persisted.”
Mason also said that more corporate clients in the firm’s treasury and trade solutions unit have asked the bank to help them receive direct payments from consumers - a business usually operated by Visa and Mastercard, and hinting at potential widespread liquidity problems.
Meanwhile, Goldman Sachs CEO David Solomon was more veiled, saying in a CNBC interview Tuesday that while the quarter has been “up and down,” he declined to give a forecast for the firm’s trading revenue.
What about JPMorgan? The largest US bank is also unlikely to escape unscathed - CEO Jamie Dimon warned previously that trading revenue has declined.
In the first warning last month, Citi CEO Michael Corbat warned that market uncertainties - which is odd considering the VIX has been trading in the low to mid-teens, right on top of its historical average - have led clients to stay away from trading. One almost wonders how quickly the entire market will close when central banks lose control of volatility and the VIX explodes once again.