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Strength in Jefferies' earnings signals hope for big Wall Street banks

Jefferies Financial Group Inc. set the stage for what could be a strong fourth-quarter 2019 earnings season across the financial sector on Jan. 8 when it posted surging results in its equity and fixed-income trading businesses.

Between September and November 2019, the investment bank saw its equities trading revenues jump 22% year over year while fixed-income trading revenues spiked 87.8% compared with the two months ended Nov. 30, 2018. That performance could be a sign of what is to come at Wall Street's biggest banks, Credit Suisse analysts wrote in a note following Jefferies' earnings report.

"In the early days of fiscal 2020, sentiment and momentum are much better than at the same time last year," Jefferies CEO Richard Handler and President Brian Friedman wrote in their annual shareholder letter, posted to the company's website Jan. 8. "We have seen a resurgence of merger and acquisition activity, flourishing capital markets, the anticipation of a negotiated Brexit, continued strong employment numbers, accommodative global monetary support and an abundance of liquidity."

The operating environment in the final months of 2019 was considerably different than the prior year.

While equities, as measured by the S&P 500, fell nearly 14% in the final quarter of 2018, the broad-market index ended 2019 on a three-month run to gain 8.5%. The fixed-income markets, meanwhile, proved to be a popular safe haven for investors in 2019 as asset flows into bond exchange-traded funds reached all-time highs. The Bloomberg Barclays U.S. Aggregate Bond Index, which is widely used as a gauge of the bond market's performance, rose more than 9% in 2019.

Trading businesses across large investment banks including Citigroup Inc., JPMorgan Chase & Co. and Bank of America Corp. could stand to benefit from those conditions, Credit Suisse analysts Susan Roth Katzke, Adam Krasner, Gerard Padilla and Peter Hamilton wrote in a Jan. 8 note.

Executives have hinted that they expect their fourth-quarter 2019 trading results to well exceed those units' performances in the same period of 2018.

In December 2019, Citigroup CFO Mark Mason detailed that the bank's fixed-income and equities revenues in the fourth quarter will likely "be up in the high teens." JPMorgan CFO Jennifer Piepszak said at the same time that the bank is expecting equity and fixed-income, currency and commodity revenues to be "up meaningfully" year over year. And Bank of America Chairman and CEO Brian Moynihan disclosed in December 2019 that his bank was expecting "a little bit better" than its usual seasonal trading decline from the third to the fourth quarter.

However, a rush of trading revenues in the fourth quarter could clash with crunched net interest margins at the largest U.S. banks in their quarterly earnings reports for the period.