In case you missed it, financial markets were in a frenzy before and after the US elections last year, as speculations led to a flurry of positioning and Trump’s victory inspired a strong rally in US assets. Forex brokers have already reported record-high volumes from the event as traders increased their positions and trades to take advantage of the surge in equities. With that, analysts are speculating that financial firms in Wall Street may be poised for their best-ever quarterly performance by reporting a significant pickup in earnings for the last quarter of 2016. The market action didn’t stop in December, as traders turned their attention to the Federal Reserve’s monetary policy statement.
Speculations of a 0.25% rate hike were running high as the US economy approached full employment and consistently posted improvements in performance. Not only did Fed Chairperson Janet Yellen and her fellow FOMC members deliver, but they also hinted that three more interest rate hikes are on the horizon for 2017 as further potential economic progress is expected, sending US securities much higher.
Estimates compiled by Bloomberg indicated that fixed-income and stock-trading revenue at the top five US investment banks jumped 20% from the same period last year to $17.3 billion, spurred by a 32% increase in bond trading. Revenue at Morgan Stanley, which is the smallest bond shop in the group on Wall Street, may be expected to rise 82% to $1 billion.
Thomson Reuters data suggests that companies in the benchmark S&P 500 index are set to report a 6.2% growth from their bottom lines in Q4, marking their strongest pace of increase since printing 7% growth in 2014. The climb in US stock market indices has pushed price-to-earnings multiples to their highest levels in a decade, as the S&P 500 index is trading at 17.1 times forward earnings.
Positive trades may shore up revenues from the biggest financial firms, particularly when it comes to forex and rates. Banks’ total profit may be up to by 17% in Q4 to nearly $21 billion. These are also expected to report $6.39 billion in stock-trading revenue, up 4% from the same period last year, mostly spurred by gains from JPMorgan and Citigroup. Bank of America, Wells Fargo, and JPMorgan have released stellar earnings results while Morgan Stanley, Citigroup, and Goldman Sachs will be reporting their figures within the week.
But while these institutions were able to catch a huge chunk of the gains from the Trump rally by buying shares of US firms and smaller companies, market watchers seem doubtful that these profitable streaks may be sustained. After all, Trump’s first press conference did quite a number on sentiment as the President-elect was his usual brash self instead of sounding as diplomatic as he seemed during his victory speech.
Another cause for disappointment was his failure to discuss details of their fiscal policy plans, which are expected to favor corporate America through tax reform, increased infrastructure spending, and a healthcare overhaul. Instead, the Donald focused on Russia’s alleged election hack and vented out his frustrations about mainstream media.
Market watchers are also questioning whether the return of bond trading is here to stay or not, as this has been traditionally the biggest driver of Wall Street profits. Some believe that the honeymoon period with Trump is about to end and that increased uncertainty when it comes to trade policies or diplomatic relations may undermine the strength in the US market. Others think that a few months in office and actual reform could be enough to “Make America great again.” Keep in mind that Trump also promised banking deregulation in his campaign, pledging to limit the role of financial watchdogs such as the CFTC and SEC in overseeing Wall Street activity.
Head of Research at Keefe, Bruyette & Woods, Fred Cannon, noted that investors need to feel confident that the Trump administration can follow through with its campaign promises before markets see sustained trading volumes. In that case, brokers and institutions may continue to benefit along with retail traders. Fixed-income trading may keep expanding as companies reprice debt and large mergers could materialize.
Apart from that, US securities may be poised to take advantage of a foreseen slowdown in Europe in the wake of EU negotiations about Brexit. UK Prime Minister Theresa May has conceded that the government is willing to give up access to the single market in exchange for imposing their own immigration controls and being autonomous from European Court of Justice rulings. In that case, both the UK and the rest of the euro zone may be on shaky footing in terms of trade, thereby limiting investment in the region.
Of course banks may still tread cautiously for fear of overleveraging. According to Morgan Stanley President Colm Kelleher, trading desks have shown “over-exuberance” lately due to their impressive performance, but that the overall fee pool relating to fixed income and equities is only marginally higher. He noted that the first quarter of the year is historically the strongest one for traders, but that this wasn’t the case last year as global growth concerns dampened returns in the first three months.
This time around, geopolitical risks seem to be at the front and center of financial market action, although there may be some clarity to be expected throughout the course of the quarter. That is not to say that the rallies are poised to resume before the second half of 2016 but that investors may get a better sense of how markets may fare by the time the dust settles. Keep in mind, though, that a sharp selloff might not necessarily be indicative of southbound price action for the rest of the year but may be a much-needed pullback from the earlier rallies.
So far, positive sentiment is evident among Wall Street firms and analysts, as investors may be gearing up for gains in the financial, technology, healthcare, consumer staples, industrials, telecoms, and materials sector for this year.
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