Reuters / Lucas Jackson
- Fixed-income trading has suffered across Wall Street in the past few years.
- That's thanks in large part to market volatility evaporating.
- It's early, but there are signs that volatility is ramping up and the fixed income, currency, and commodities business is jolting back to life.
Goldman Sachs CEO Lloyd Blankfein recently commented that his firm wasn't sitting around singing "Kumbaya" while waiting for fixed-income trading to return.
The fixed income, currency, and commodities (FICC) business suffered across Wall Street in 2017, but it especially plagued Goldman. In the fourth quarter the unit's revenues were just $1 billion, a 50% decline from a year ago and a 31% drop from the previous quarter.
FICC, formerly a profit center for many investment banks, has been on a multi-year slide, with many firms scaling back their operations - chief Goldman rival Morgan Stanley, for instance, trimmed their FICC headcount by 25%. Goldman, meanwhile, has held firm in belief that the business would rebound.
Whether Goldman executives sat around a campfire singing gospel and hoping for divine intervention in the markets, we may never know. But this much is certain: In the early days of 2018, the moribund FICC business is showing signs of jolting back to life.
Morgan Stanley itself hinted as much while discussing the FICC business during its fourth-quarter earnings call in January, noting that it had seen both rate and foreign-exchange volatility spike in the preceding two weeks.
"Very early days, but there is signs that from a sales and trading perspective we are seeing heavy levels of engagement and a little bit more [volatility] and a little bit more activity," Jonathan Pruzan, the company's CFO, said on the call.
A couple days later, we asked an industry consultant who regularly works with top management at the largest investment banks on Wall Street what he had heard on FICC performance thus far, and he reported that trading "seemed to be in a good place," in part because European regulatory market reform known as MiFID II failed to have the sizable impact that many were expecting.
"Surprisingly a good start to the year, all the banks were expecting clients to sit on the fences till MiFID II was sorted and then see some activity but it's not been a barrier at all," he told Business Insider.
Credit Suisse CEO Tidjane Thiam echoed the sentiment.
"Volatility has been low but since the beginning of the year we have had the very rare combination of equity markets going up and volatility going up," he told Bloomberg TV in an interview from the World Economic Forum meeting in Davos.
And last week, Daniel Pinto, the head of corporate and investment banking at JPMorgan Chase, told analysts at UBS that he expects global FICC revenues to increase this year.
What changed in the markets?
The FICC business suffered so badly in 2017 in large part because volatility evaporated. Cross-asset measures of volatility have been at historically low levels for months.
As Pinto told UBS, this compressed credit spreads and crippled revenue. Trading volumes were actually higher in 2017 than 2016, but JPMorgan's FICC revenue fell 16% thanks to tight spreads, Pinto said.
But that has started to turn around in 2018, and he now expects a "relatively positive year for markets revenue."
Pinto says volatility has spiked in 2018 thus far thanks to tightened monetary policy in Europe, the weakened US dollar, and higher long-end rates, the UBS analysts wrote in a research note.
The Cboe Volatility Index - known as the VIX - had been locked near record lows for much of the past year, but has already spiked 20% year-to-date.
Foreign exchange traders are seeing market tumult as well, thanks in part to some mixed messaging out of the White House regarding their preferences toward the strength of US dollar, which has experienced extended declines compared with other G10 currencies.
And there's rumbling in commodities, too.
Jeffrey Currie, Goldman Sachs' head of global commodity research, said in a research note on Thursday that he expects "commodity price volatility will rise from the current historically low levels" thanks to declining inventories in key commodity markets.
That's good news for Goldman Sachs, since one-third of the decline in their FICC business was attributable to commodities, CFO Marty Chaves said on the earnings call.
As most Wall Street experts have noted, it's still early. But if volatility does come roaring back for good, Blankfein and company will have plenty to sing about in 2018.
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