US Banks’ Trading Gain Likely to Fade Away After First Quarter

Amid the financial uncertainty of the coronavirus outbreak, the key major US banks had gained in their trading during the first quarter (Q1); however, several financial analysts suggested that such fortune would be a momentary gain and is likely to decline due to wild swings of the global market.

Reuters reported this week that trading revenue could be raised from 8% to 20% to five big Wall Street banks namely JP Morgan Chase & Co., Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc., and Morgan Stanley

Dark Optimism of the US Banks

The widespread virus epidemic has destroyed the global economy which gave a harsh impact on the US economy alone and the prolonged turmoil of economic devastation could ultimately lead to a global recession. Amid the uncertain swing of markets due to the virus outbreak, analysts viewed a dark optimism regarding the condition of the US banks since it was likely that the surge of trading could be overshadowed soon.

Hinting the momentary gains of the five banks, a note of less optimistic view was opined by a sixth, Chris Kotowski of Oppenheimer & Co., who estimated a double-digit revenue decline for some banks because “these kinds of markets almost always lead to some trading inventory losses.” Nonetheless, Kotowski expected that banks with heavy exposure to trading would have better conditions as compared with large lending businesses.

Keeping a similar view, analysts observed that the reasons for good trading business during the Q1 was due to the government’s response to the economic volatility and rescue package. However, the trading activity began declining by late March, and few expect it to return as the year goes on. Evercore ISI analyst Glenn Schorr said in a recent report, “Good temporary news for the big banks is trading was really good in 1Q.”

Market Volatility due to Coronavirus

Many analysts explained that the Wall Street banks experienced this kind of dimension in Q1 of 2009 wherein the government took up responsibility for maintaining economic decay.  During the financial setback of 2009, investors were worried that banks were in serious trouble but rescued by government stimulus programs by creating a trading boon. However, it was expected that this time would be different as the coronavirus volatility remained uncertain.

Since then, American banks have dramatically restructured their trading businesses and trading activities have become much more fleeting, even when they were facing extreme. Morgan Stanley analyst Betsy Graseck said in an interview, “If we look back to, like, 2Q ‘18 when we had that sharp market correction, it took several quarters in a good economy for that trading activity to come back… With this economy, it’s going to take a little bit longer.”

The manner that stock markets plunged and soared day-to-day was a rare phenomenon because of the virus impacted market uncertainty. Considering the current economic condition due to the virus, the US Federal Reserve has been cutting interest rates and pouring trillions of dollars into financial markets to address liquidity issues. Meanwhile, analysts projected that banks that invested in stocks, treasury bonds, and foreign-exchange swaps would be better than those in corporate credit during such stressful times.

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