An eerie calm in capital markets is fuelling fears on Wall Street that a first-quarter rebound in trading revenues could prove a one-off.
Big investment banks reported generally solid profits over the first three months of the year, as investors reset their portfolios to take account of higher base interest rates, and as companies front-loaded efforts to raise money. For all bar four of the top 14 banks, first quarter trading revenues were higher than a year earlier. In debt trading, all 14 apart from UBS and Barclays reported year-on-year rises.
But activity faded in April and, so far in May, it has been quiet, according to traders — suggesting many banks will struggle to sustain that bright start to the year.
Shawn Matthews, chief executive of Cantor Fitzgerald, a mid-sized broker-dealer, noted that the threat of mark-to-market losses on bonds tied to Puerto Rico, and the energy sector, had made investors more conservative.
“It’s across the entire spectrum, from big ‘long-only’s to hedge funds,” he said. “People are starting to get a bit more cautious on their stance in the marketplace.”
Traditionally, the second quarter of the year is weaker than the first. Since 2003, trading revenues have dropped an average 16 per cent between the two, according to Credit Suisse.
But traders said the fall this time could be bigger, especially if the lack of market turbulence discourages investors from putting on big trades. Volatility is historically very low: the S&P 500 has only been less volatile on 3 per cent of the trading days since 1928.
1. Oct 1929: The Wall Street Crash
2. Oct 1962: Cuban Missile Crisis
3. Nov 1974: Oil crisis and collapse of Bretton Woods
4. Oct 1987: Black Monday crash
5. Oct 2008: Global financial crisis
In fixed-income, investors appear to be unsettled by a “disconnect” between bearish signals from the US Federal Reserve, and bullish conditions in the market, said Giuseppe Nuti, head of the central risk book for foreign exchange, interest rates and credit at UBS in New York.
“The Fed has signalled in so many different guises . . . that they want to be active . . . in raising rates and reducing the balance-sheet,” he said. “These are undeniably fixed-income-bearish statements, but we’ve had nothing but a rally.”