We previewed Goldman’s earnings last night, but as it’s getting closer, we wanted to highlight the one number we’ll be paying the closest attention to: trading revenue Fixed Income, Commodities, and Currencies.
Here’s Credit Suisse on what to look for:
While credit market conditions were generally healthier during the third quarter, with strong positive inflows into fixed income products and improving asset prices/tightening credit spreads, we do not anticipate that this will translate to a material, broad-based rebound in FICC results for the investment banks. We believe we could see some relative outperformance in results by those firms with less diverse FICC franchises and more dominated by the credit and interest rate sub-clusters.
In terms of volumes, U.S. cash fixed income volumes are up modestly quarter-to-quarter (as reported by the New York Federal Reserve Bank), with interest rate/currency/energy exchange-traded futures weaker (down 16% on average) following last quarter’s volatility- driven spike in volumes. With activity levels stable-to-lower in the more vanilla/lower margin flow products, we anticipate that this weakness has carried over into higher margin areas of the business.
Given what would appear to be an improved operating environment, why not expect some improvement? We attribute some of the disconnect between improved primary issuance and weaker secondary trading activity to the levels of liquidity on the sidelines and potentially less in the way of rebalancing activity by the client community.
Specific to Goldman Sachs, we are factoring in $3.4 billion of core FICC revenues, down 17% from last quarter and down 46% from last year. We don’t anticipate much differential among performance within Goldman’s FICC sub-clusters.
In addition to core results, we are factoring in $200 million of losses from debt valuation adjustments (DVA) due to the tightening of Goldman’s credit spreads during the quarter. Inclusive of this, we expect $3.2 billion of reported FICC revenues.
As for equity trading:
Specific to Goldman Sachs, we are factoring in $2.2 billion of total equities sales and trading revenues (-33% yr/yr, +45% qtr/qtr) including $1.8 billion of core equities revenues (+61% qtr/qtr) and $0.4 billion of securities servicing revenues. Recall 2Q results were impacted by equity derivatives related losses; we expect a strong rebound in trading results for GS.
Our estimates include $50 million of DVA-related losses. Inclusive of the DVA, we expect $1.8 billion of reported equities sales and trading revenues.