Wall Street has hit a low, and things can (probably) only get better from here
It has been a horrible start to the year on Wall Street. That much is obvious.
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 per cent to 45 per cent 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 analyst Richard Ramsden (emphasis added):
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 biggest inflows last week since June 2014. Money-market funds, seen as a safe haven, have 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 results for the three months ending February 29. Jefferies said then (emphasis added):
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 pickup 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.