Is this as good as it gets for traders in investment banks? After a strong 2020 (post enormous Central Bank liquidity injections) and a thriving 2021, the question now is whether revenues at leading investment banks are likely to soften in 2022 and again in 2023.
JPMorgan's European banking analysts suggest they probably will not.
In a note released this week, the JPM team said that the increasingly inflationary environment is likely to be a positive for banks' trading divisions. "After 10 years of persistent low inflation and low volatility, we see higher tolerance for inflation by Central Banks leading to higher bond yields and potentially more volatility," predict the analysts, led by Kian Abouhossein.
In a previous note, produced in June, the same group of analysts explained why volatility is a good thing for big banks' trading operations. - In volatile markets there's less liquidity, and it's less easy for clients to exit positions. As a result, trades increasingly require the combination of capital commitment, inventory and ease of execution that only major investment banks can provide, and that pure electronic execution venues like TradeWeb and MarketAxess cannot. In extremely volatile markets - like those at the start of the pandemic in 2020, clients prefer to deal with human beings over electronic systems.
The analysts' predictions follow comments this week from Vis Raghavan, chief executive officer for Europe, the Middle East and Africa at JPMorgan on the recent performance of JPMorgan's markets business. As 2021 comes to a close, Raghavan said equity and equity derivative trading volumes in particular are both still high and likely to remain so. Credit and rates trades are, “normalizing to pre-covid levels,” said Raghavan. However, they may yet recover. - In their June note, JPMorgan's analysts said credit and macro revenues are likely to fall in the short term, but to recover in the medium term as inflation takes hold and volatility increases.
In a separate note this week, KBW analysts predicted that U.S. banks will reveal strong equities and falling fixed income trading revenues when they announce their third quarter results next week.
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