The majority of sell-side trading desks suffered through a fairly miserable fourth quarter of 2018, with total trading revenues falling 13% on the back of particularly poor performances in fixed income. Looking across all asset classes, European firms significantly underperformed U.S. banks (-18% YoY compared to -9%). The good news is that market conditions have improved dramatically following the New Year, as has the outlook for the first quarter. The bad news is that Q1 trading revenues are expected to remain well below those produced during the first quarter of 2018 as client activity has yet to fully rebound to the lofty levels seen last year.
The chart below from analysts Keefe, Bruyette & Woods estimates first quarter trading revenues for fixed income and equities across the nine largest investment banks. The majority of the numbers are sobering on the surface, but it’s important to recognize that the estimated totals are being compared to Q1 of 2018, when trading conditions were ideal. However, the forecast still shows how the high times of the first-half of 2018 are nothing but a distant memory.
One of the biggest differences between this year and last is the fallout from U.S. tax reform in 2018, which jumpstarted the market and created a lot of conviction among clients, a Goldman Sachs analyst told Keefe, Bruyette & Woods. “While as we came into this year…after the blender we went through in December created an environment…where people entered the year with a little bit less conviction,” they said.
Banks are generally more bullish on the current environment for equities trading, though the year started off on the wrong foot, hence the disparity in the chart below. J.P. Morgan acknowledged during its investor day that the bank was off to “a slow start in the equity business,” and cautioned that overall trading revenue would fall by a percentage in the “high teens.” That would equate to the biggest estimated drop among all banks, though J.P. Morgan’s equities trading revenues increased 26% in the first quarter of 2018 to a record $2bn, making that a tough performance to top.
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