What's going on?
Jefferies, an American investment bank, reported a slump in its trading business (e.g. buying and selling stocks or bonds) on Tuesday, becoming the latest Wall Street bank to warn that business in its trading divisions has slowed.
What does this mean?
Trading revenues at Jefferies from June to August were the worst in a year and a half! In particular, bond trading revenues fell 27%. Goldman Sachs, JP Morgan and Citigroup had similar trading revenue slump-warnings for investors last week. Full quarterly earnings for major banks are due in about a month when investors will learn how much of an impact weak trading revenues had on banks’ performances overall.
Why should I care?
For markets: The bad news hasn’t stopped banks’ stocks from performing well.
Bank stocks are up significantly despite the first warnings that came out last week. Why? Trading is just one part of most banks’ activities – traditional lending still plays a big role. Over the past week or so, investors have significantly raised their expectations for faster interest rate hikes. These new expectations have been reflected in banks’ stocks: banks benefit when interest rates go up because, in short, they can charge more interest on the loans they give out. So far this dynamic has overshadowed the bad news from the trading floor.
The bigger picture: Investors just weren’t trading that much this summer…
Banks blamed less trading activity as the chief reason for their declining revenues. There appeared to be little reason to trade this summer: central banks’ policies didn’t change and there was no real movement on relevant proposals from the Trump administration (note: these seem to be changing now). Typically, events that lead to changes in the economy prompt investors to trade in order to adjust their investments accordingly.