Market madness sets up another strong quarter for banks’ trading desks

Wild markets are the gift that keeps on giving for the trading operations of Wall Street banks.

First it was the pandemic, which caused stocks to plunge sharply in early 2020. A massive injection of cash from the government halted the slide and fueled a swift recovery. Everything went up. meme actions, a boom in public offerings Y cryptocurrency craze Following. Now, fears of inflation and recession are causing everything to fall again.

banks make money on the rise and on the way down through trading desks the connections between buyers and sellers work.

JPMorgan Chase

and company and

Citi Group Inc.

both expect the second quarter to be among the best in their history for business revenue. At JPMorgan, trading revenue is expected to grow 15% to 20%, executives said recently.

Citi Group

expects business revenue to rise more than 25%.

A year ago, bankers said they expected the The commercial boom of the pandemic era will fade. They have been wrong ever since.

In fact, little has gone according to plan since Covid-19 hit. US inflation continues to be higher than expectedreaching levels not seen in decades. Global supply chains thought to be temporarily disrupted by the pandemic remain entangled, driving up commodity prices. The dollar is rising when inflation should be driving it lower. Recession fears are growing, but unemployment remains low and American consumers appear to be in good financial health.

The confusing economic outlook has investors selling stocks and bonds at the same time, keeping Wall Street’s trading floors busy. Stocks rose on Wednesday after the The Federal Reserve approved its biggest interest rate hike since 1994reflecting in part continued expectations by some investors that the market should rebound after sharp declines this year.

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Heading into this week, US cash stock volume is up 16% from the same period a year ago, according to analysts at Credit Suisse. Stock futures and options rose 12%. Both are up 77% from the second quarter of 2019. While volume is down a bit compared to the first quarter, analysts said the seasonal decline is smaller than normal.

Volatility has also increased considerably for stocks and bonds. That’s usually good for banks, because it creates more trading volume. The CBOE Market Volatility Index, or VIX, has been on average 48% higher than it was in the second quarter of 2021. A comparable measure for bonds, the ICE Bank of America Merrill Lynch Move Index, is twice as high. which was a year ago. .

“Volatility is basically our friend, and we haven’t just had volatility in one or two asset classes,” Andy Morton, global head of markets at Citigroup, said at a conference on Wednesday.

Citigroup, he said, has benefited from large corporations trying to hedge their businesses against fluctuations in global interest rates, Foreign exchange and merchandise.

Still, the market swings are not all good news for banks. The stock market crash has crushed the initial public offering market and quelled a merger boom that money minted for banks for much of the last two years. Globally, second-quarter merger volume is down 20%, according to Dealogic, and IPO volume is down 70% from a year ago.

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Morton said he expects investment banking fees to fall more than 50% across the industry, including Citigroup.

“Banking is in a tough place right now,” Morgan Stanley Chief Executive James Gorman said on Monday, alluding to the slow pace of IPOs this year. “Is it permanently affected? No. It’s late. Trading remains active. If trade softens in the coming months, so be it.”

Write to David Benoit at David.Benoit@wsj.com

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