So is the panic over? Perhaps the declining FICC business over the last few years has simply been a reflection of a bet which has mostly gone one way, and of central banks which have shrunk the supply of bonds in the market and created increasing correlation between assets.
Perhaps all the big market makers needed was a shake-up, an event which was unexpected, but not too disastrous, and capable of multiple interpretations. A market where clients, in short, could take opposing views and reposition portfolios.
There have, of course, been multiple market dislocations over the past few years — taper tantrums, periodic bouts of crisis in peripheral Europe, the AT1 panic early this year, the oil price collapse, Russian invasions and disturbances, the Arab Spring, the abandonment of the Swiss franc peg — but none of these quite worked for the banks.
None were truly two-way situations. Market-makers had no appetite to stand in front of a sovereign debt crisis, taking on inventory and betting on the vagaries of a late night European summit. Instead, prices gapped out on little volume, then screamed back in whenever Draghi said something soothing.
Most intriguing about the Brexit-inspired trading boom though, is the suggestion that the US firms also gained market share on the back of the increased Brexit volume.
The week ahead brings earnings from Deutsche Bank, Barclays, Credit Suisse, UBS, and BNP Paribas, among others, which should serve to confirm or deny this thesis (promoted by, well... the chief financial officers of American banks).
If it’s true though, it’s worrying. It suggests the US banks, even those that cut 25% of their fixed income staff last year, went into the Brexit vote with more capital to deploy, better reach and distribution, and will be positioned to capture any future revival in fixed income trading. They will indeed be the last firms standing.
While fixed income shone, the longer term, strategic bits of investment banking business didn’t have a great quarter. Conditions were better than in the first quarter, but looming uncertainty isn’t great for getting deals done in ECM or in M&A.
It’s not like anything about the Brexit process is much clearer than it was on June 24, but that didn’t stop SoftBank bidding £24.3bn for ARM Holdings, the first big inward investment into Britain announced since the vote.
The deal, referenced on the Goldman earnings call, is a bit like a Rorschach test for Brexiteer beliefs… is it a sign that the Japanese see the strength in a soon-to-be proudly independent Britian, or a sign that the pride of British business has become a currency-driven bargain basement? Or simply a hyper-acquisitive firm with cash to burn in search of a coherent strategy?
DCM hasn’t been too special for most of the banks to report so far, with the major exception of Goldman, which saw revenues up 20% on the back of a “significant asset-backed related transaction”. Following a little digging, we found the deal in question was a securiitzation of mortgages from the Barclays non-core book — but to move the needle on $724m of DCM revenues, it must have been quite the trade.
Keen Brexiteers, meanwhile, might find confirmation of their prejudices about Europe in a recent European Court of Justice ruling.
The case concerned the legality of the European Commission’s “Communcation” on state aid — a 2013 document which took a fairly firm line, as you might expect.
Although the case concerns a situation before the Bank Resolution and Recovery Directive was passed, it was widely expected to have implications for the Italian government, which is desperate to use state funds to rescue its banks.
Instead, though, the ECJ equivocated. It ruled the Commission’s communication was within EU law, but it was non-binding on member states. What this means for state aid in future is therefore clear as mud.
More European joy to follow in the week ahead though, with the EBA’s 2016 Stress Test results due on Friday.
Detailed results will be out at 9pm UK time, which should limit any market impact (though ruin a summer night at the pub for the bank analyst community). It will, however, cast a pall over the last possible funding week before August torpor sets in.
Lastly, a shout out for staff at RBC Capital Markets in Europe, who have been engaged in charitable endeavours. Last week, staff at firm’s fundraising for Great Ormond Street Hospital hit the £2m mark.