(The opinions expressed here are those of the author, a columnist for Reuters.)
By Jamie McGeever
LONDON, Oct 17 (Reuters) - The big five U.S. banks have published their third quarter earnings and — as expected — all reported a double-digit slump in bond trading.
What’s less clear is what, if anything, will generate the volatility required to open up trading opportunities, get currencies and bonds moving again, and ultimately boost revenue.
JP Morgan, the world’s biggest market trading bank, posted the steepest decline in fixed income, currency and commodity (FICC) revenue, with a 27 percent slide from the same period a year earlier to $3.2 billion.
Goldman Sachs was close behind with a 26 percent slide to $1.45 billion. Citi posted the smallest decline but even that was down 16 percent on the year, as this chart from IFR’s Steve Slater shows:
The ultra-low volatility that has dominated the financial market landscape this year means the mega banks find themselves in the same boat as hedge funds, struggling to make money from FICC trading.
“Low vol” (or historically speaking, almost no vol) has compressed global interest rates, making it almost impossible to find and exploit rate differentials. That in turn has made it difficult to establish long-lasting and money-making trends in exchange rates.
Even though the Federal Reserve is raising rates and about to begin unwinding its QE-inflated balance sheet, it’s the most telegraphed tightening in history. It’s almost glacial.
U.S. Treasury market volatility slumped to a four-year low of 52 percent in the third quarter, having opened the year around 80.0.
Currency market volatility did pick up in Q3, reaching a five-month high in late September. But over the course of the year it has been on a downward path, reaching in a near-three-year low in May. This week it fell to its lowest in three months.
There have been moments this year when it looked like volatility would finally break out, at least in equity markets. While not directly affecting FICC, a sustained rise in stock market volatility and turbulence there would certainly spread to currencies and bonds.
In August, turmoil in the White House and U.S.-North Korea tensions triggered a sharp rise in the VIX gauge of S&P 500 implied volatility, Wall Street’s “fear index”. The VIX at 17 percent was far from a historical peak but it was the highest since November last year.
It was short-lived, though, and normal service soon resumed. According to Charlie Bilello at Pension Partners, the VIX has averaged less than 10 percent this month, putting October on track to be the least volatile month for the S&P 500 in history. The next three least volatile months were July, September and June this year, with the VIX average below 11 percent.
Bond markets were rattled at the end of June when European Central Bank President Mario Draghi, in a speech in Sintra, Portugal, hinted that the central bank might soon row back its aggressive stimulus.
But the only rowing back was from central bank sources, almost immediately afterwards, in an attempt to limit the surge in bond yields and the euro. Volatility barely blinked.
What will shake things up?
Even if the ECB announces later this month that it will begin unwinding its quantitative easing (QE), as is widely expected, its balance sheet will shrink only in slow-motion.
And if the Bank of England does raise rates next month as it has hinted, investors won’t be surprised. It may also prove to be the BoE’s only hike if Brexit takes a toll on the economy.
Hardly the stuff of surging volatility, widening yield spreads and heightened exchange rate uncertainty. And unlikely to revive banks’ FICC trading activities and revenues.
Reporting by Jamie McGeever; Editing by Catherine Evans