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Q2 fixed-income trading remains weak at Europe's investment banks


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Q2 fixed-income trading remains weak at Europe's investment banks

Fixed-income, currencies and commodities trading remained weak at major European investment banks in the second quarter, although their U.S. peers showed greater resilience, as growing geopolitical tensions rattled markets.

Seven of the 13 banks sampled by S&P Global Market Intelligence reported lower FICC revenues year over year, but Citigroup Inc. was the only U.S.-based firm to see a decline. Bank of America Corp.'s FICC revenues were flat, while the other American banks in the sample, including Goldman Sachs Group Inc., Morgan Stanley and JPMorgan Chase & Co., recorded an increase. All the U.S. banks showed a quarterly decline, however.

Equities trading was again the main driver of total revenues in the second quarter, with eight of the 13 sampled banks reporting a year-over-year growth in this segment and one lender, Société Générale SA, booking stable revenues.

Switzerland-based UBS Group AG emerged as the best performer in terms of total revenue growth in the second quarter, booking a year-over-year rise of 19.29%. U.S. peers Goldman Sachs and Morgan Stanley followed with increases of 17.01% and 13.70%, respectively.

French group Natixis led the underperformers' list, with a 20.86% year-over-year slump in total second-quarter revenues, followed by Germany's Deutsche Bank AG with a 13.99% drop and HSBC Holdings PLC with a 12.60% decline.

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Geopolitical tensions hit bonds

Growing geopolitical tensions sent jitters through global bond markets during the second quarter, investment firm Schroders said in a markets overview. The escalating trade conflict between the U.S. and China and the formation of a new anti-establishment government in Italy were among the key factors. Another market dampener was the strengthening U.S. economy compared to a slowdown in other parts of the world, Schroders said.

U.S. two- and 10-year Treasury yields surged in the quarter, while the spread between them shrunk to its lowest point since 2007, according to Schroders. Italian short- and long-term sovereign bond yields also jumped after the new government took power in May, reflecting investor worries about Italy's future relationship with the EU. The uncertainty around Italy had a knock-on effect on Spanish bonds, with 10-year sovereign yields surging there as well. Emerging market bonds were hit by the strengthening U.S. dollar, while global corporate bonds made negative total returns with the biggest declines recorded in U.S. dollar investment grade and euro high-yield bonds, Schroders added.

The quarter saw weaker flows and the outperformance of lower quality credit — in general U.S. CCC-rated credit, which is more akin to equity risk and more geared to the U.S. economy, Andrew Jackson, head of fixed income at London firm Hermes Investment Management, said in an emailed comment.

"The latter trend has somewhat reversed in July with the outperformance of high-quality long-dated bonds and also [emerging market] debt, which had been subject to numerous idiosyncratic events," he added.

Geopolitical events that drove volatility over the second quarter remain concerns for the second half, alongside "a massive wall of supply [in both loans and bonds] that could cause digestion problems if flows do not keep up," Jackson said.

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Commodities outperform

Second-quarter volatility did not play out badly for all FICC products, with commodities substantially outperforming the rest of the pack, George Kuznetsov, head of research and analytics at business intelligence firm Coalition, said in an interview. Coalition is owned by S&P Global Inc.

Another class that stood out in the first half were foreign exchange products in general and specifically G10 foreign exchange, which includes spots, forwards and options.

"Most of [the growth] is related to the equity indexes volatility and some of the trading opportunities related to that," Kuznetsov said. Cross-border banking transactions generated sizeable forex trades for most of the global banks in the period, Kuznetsov said. Forex growth also had a positive effect on emerging-market macro products, he said.

Looking ahead, Kuznetsov predicted that the second half will be "significantly weaker" than the first given the cyclicality of fixed-income products, which typically see a trading slowdown in the third and fourth quarters.

On a year-over-year basis, the second half is likely to deliver a flattish performance, Kuznetsov said. Taking into account the "significant underperformance" in the second half of 2017, there might be a marginal improvement but definitely no big changes are expected from a year ago, he said.

Positive economic, earnings effects support global equities

Positive economic and earnings effects managed to largely offset the geopolitical turmoil and helped global equities achieve gains over the second quarter, Schroders said. U.S. equities were mainly supported by the strong economy and higher earnings, while eurozone and U.K. equities got a boost from the central banks' decision to keep interest rates unchanged, the investment firm said.

Energy and technology stocks were among the biggest gainers over the period in both the U.S. and Europe, while financial stocks were among the weakest in both regions as they were most sensitive to the flattening of the bond yield curve in the U.S. and the concerns around Italy in Europe, according to Schroders. Japanese equities also gained despite the U.S.-China trade tensions, but emerging-market stocks saw sharp falls in the second quarter, mainly driven by the strong U.S. dollar, the investment firm added.

Coalition is owned by Crisil. S&P Global Market Intelligence and Crisil are owned by S&P Global Inc.

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