Macaskill on markets: Bank trading desks set to win bigly under Trump
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.
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.
Goldman had a decent quarter, but was only towards the upper end of the middle of the pack for both fixed income and equity trading.
The departure of Michael Sherwood from his position as co-head of Goldman Sachs International (GSI) may be linked to issues unrelated to near-term performance, including his embarrassingly close connection to disgraced UK billionaire Philip Green.
The news that Sherwood’s longstanding co-head Richard Gnodde will replace him as sole head of GSI indicates that Goldman is not planning a sudden shift back to rule by traders, however.
Sherwood, a consummate sharp-elbowed Goldman trader, is to be replaced by an executive with a background in corporate finance and a reputation for being less abrasive (by Goldman standards, at least).
Goldman may instead feel that it can quietly move to re-establish itself as a top trading house while continuing to make reassuring noises about being a safer, more client-focused bank, or indeed an evolving technology firm, which has been the thrust of its recent marketing efforts.
There is unlikely to be a great cost to mild inconsistencies in messaging as the new populist era begins.
Dispersion between the share prices of different banks may come from changing perceptions of the risks from increased uncertainty about policy direction, however.
Disruptions to actual global trade flows, rather than swings in traded markets, from protectionist policies represent the obvious major risk. The biggest global trade financing banks, such as HSBC, would be among the firms with the most downside in this situation.
There are plenty of other potential trouble spots, though.
There were signs of balkanization of regulatory policy shortly within days of the US election, for example, as the European Commission hit back at perceived over-reach by US supervisors.
Goldman could be one of the biggest losers if that tussle turns into a battle that pushes European clients back to greater reliance on their domestic banks.
As banks and investors face the prospect of greater uncertainty, one theme that does seem likely to emerge is the importance of a Goldman Doctrine – as in the screenwriter William Goldman, not the bank.
“Follow the money,” was one phrase he wrote, that became iconic, for the screenplay for the Watergate movie All the President’s Men.
He is also well known for the opening line of his memoir on a life in Hollywood: “Nobody knows anything.”
If that becomes the motto of markets in the new era then life for traders will at least recover some of its zest, even if it proves to be a bumpy ride for everyone else.