Macaskill on markets: Bank trading desks set to win bigly under Trump

By:
Jon Macaskill
Published on:

Bank stocks rallied after Trump’s victory in the US election on hopes that higher trading revenue will outweigh potential disruption to global trade. A second act for traders now beckons.

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Traders are the most Trump-like figures within banks. They have short attention spans, crave instant rewards and view consistency as a weakness rather than a virtue.

Like Trump, traders have been feeling unloved in recent years but now have an unexpected chance to reassert themselves on a big stage. The trading performance of big firms in the coming quarters will help to determine whether the sharp rally in global bank stocks since the US election becomes a sustainable recovery that helps share prices to stabilize above the nominal value of banking assets.

Some of the rise in bank shares was based on the assumption that a combination of tax cuts and construction spending in the Trump era will be inflationary, sparking interest rate rises and steeper yield curves. That should revive net interest income at banks as they harvest the widening gap between short and long yields.

There is no real need for trading expertise to deliver this benefit.

The second act for the trader within the banking industry could instead come from the sheer unpredictability of outcomes as Trump and other populist leaders play a growing role in determining market outcomes. 

With Trump and other leaders from outside traditional elites now calling more of the shots, an element of surprise has been restored to policy and market direction 

Automation has undermined the value of human traders in recent years, as it has for other lines of work. The role played by central banks in attempting to underpin asset markets has also served to diminish the need for traders. Central banks have not always been successful in securing their desired outcomes, such as Goldilocks-style measured revivals in lending and growth.

They have become increasingly effective at telegraphing their intentions, however, which reduces the need for traditional trading skills within banks and has created a zombie-like hedge fund industry that has performed so poorly that even the slowest-moving end investors have started to question the need for high fees.

With Trump and other leaders from outside traditional elites now calling more of the shots, an element of surprise has been restored to policy and market direction.

Air of embarrassment

There is still an air of embarrassment hanging over the Davos attendees – from CEOs to consultants and central bankers – who so spectacularly failed to anticipate the likelihood of a vote for Brexit in the UK in June and then Trump’s victory in November.

Traders, like the president-elect, do not share this shame at being proved wrong by the tide of events. The short-term opportunity at hand is key, and here there are reasons for optimism for traders.

Bank of America’s chief operating officer Tom Montag – a highly successful Goldman Sachs trader before he became number two at Bank of America – was quick to talk up the benefits of the boost to market activity seen after the US election. He noted that BofA had recorded its highest ever NYSE and Nikkei volumes the day after the election and predicted that fourth quarter trading revenues would rise by a double-digit margin compared to the same period last year.

The comments may have been partly prompted by a desire to combat a perception that banks with a bias towards trading, such as Montag’s old firm Goldman, will be the main beneficiaries of renewed market volatility and a potential reversal of the trend towards increased regulation.

The theory that Goldman played a fiendishly cunning game by dragging its feet on Volcker Rule implementation and is now poised to exploit an era of regulatory rollback by unleashing the animal spirits that once drove its leveraged proprietary dealing profits is a bit of a stretch. 

Republicans will certainly be in a position to replace key elements of the 2010 Dodd-Frank law that reformed US financial services, but they are likely to focus on easing compliance burdens rather than reversing every rule that arrived after the 2008 credit crisis. Bank stock investors might also look askance at a firm that openly abandoned the industry-wide commitment of recent years to client-focused, lower-risk trading. 

Nor is it clear that Goldman retains a trading advantage over its peers. When there was an unexpected rebound in third-quarter fixed income results for banks, helped by reaction to the Brexit vote, the biggest proportional revenue increase was seen at Morgan Stanley, which started 2016 by cutting around 25% of its debt traders, as CEO James Gorman noted with trademark grim satisfaction when announcing the bank’s earnings.