Citigroup is out with a big, negative call on major banks today.
Of particular note, analyst Keith Horowitz is gutting his estimates for Goldman Sachs and Morgan Stanley.
For Goldman, Q2 EPS has been cut from $3.75 to just $2.00 (current consensus stands at $3.56) and for Morgan Stanley, they’re cutting their estimate from $.59 to $.43. Current consensus stands at $0.56.
What’s the culprit behind these ugly results? Basically, the core business of these firms — Fixed Income Currency & Commodity Trading (FICC) is going to be ugly.
Fixed income trading revenue will probably fall 30% sequentially due to weak volumes, low leverage, risk aversion (Horowitz cites the wider high-yield and sovereign spreads as evidence for this) and generally falling volatility.
Forex revenue was alsy pretty subdued.
Below we show currency volatility as measured by the CVIX, which showed a sharp increase in the past week to move by a 9% q/q increase from end-to-end, but there had been relatively flat volatility on an average basis over the period (up just 1% vs 1Q). We believe lower volatility over most of the quarter likely is compatible with our view that 2Q volumes and client activity is below-average.
Commodities should be pretty solid.
Equities trading has been awful. Equities trading revenues will probably fall 10-15% Q/Q due to lower volumes, and fading volatility. In Q2, US cash equity trading volume fell 8% from Q1. VIX — despite all the headlines — has been a dog.
This table shows the collapse in trading volumes by exchange:
Other factors that will hurt banks: the collapsing value of securitized products (which we’ve written about here), and widespread declines in investment banking volumes.
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