Finance

Michael P. Regan is a Bloomberg Gadfly columnist covering equities and financial services. He has covered stocks for Bloomberg News as a columnist and editor since 2007. He previously worked for the Associated Press.

Goldman Sachs offered more confirmation on Tuesday that the sun was once again shining on Wall Street's fixed-income trading desks. 

Revenue from executing client orders in FICC -- fixed income, commodities and currencies -- jumped 49 percent to $1.96 billion in the third quarter, excluding accounting adjustments in the same period a year earlier. That led a surge among the four large banks with big trading desks that have reported results so far.

FICC Rebound
Banks with big trading desks have reported huge year-over-year gains in revenue from fixed income, commodities and currencies
Source: Company announcements via Bloomberg

The year-over-year gains are a bit misleading on their face, considering the third quarter of 2015 was an ugly period for trading desks after China's unexpected devaluation of its currency ushered in a volatile stretch in markets that many clients may have chosen to sit out.

And in the latest quarter, clients of all banks may have been either forced into action to some degree, or at least found plenty of one-time reasons to trade: the Brexit vote took place just before the quarter began, and looming regulatory changes in the $2.6 trillion money-market industry caused a reshuffling of money between funds as well as a large move higher in Libor rates. 

Creeping Higher
Libor rates rose significantly last quarter ahead of regulatory changes in the money-market industry
Source: Bloomberg

The pickup in institutional client services, Goldman's biggest business, was enough to overshadow a 1 percent drop in revenue from investment banking and 4 percent growth in revenue from investment management. The investing and lending segment was also a standout, with revenue more than doubling to $1.4 billion as global equity markets were significantly higher than a year ago. 

Results also got a boost from lower legal bills: Net provisions were $46 million in the third quarter, compared with $416 million in the same period a year ago. It's hard to imagine legal provisions remaining that low because a smattering of financial-crisis era lawsuits and investigations into the bank's relationship with Malaysia's 1MDB fund are still outstanding.  

The eternal question that investors crave an answer to is whether this pickup in trading for a second consecutive quarter is sustainable or whether it's just a temporary reprieve. In other words, is this what the new normal on Wall Street looks like, or will the banking Etch A Sketch get shaken all over again? 

Frustratingly, that answer is elusive. 

For one thing, banks tend to describe these results in the vaguest possible terms, which makes sense for competitive reasons even as it confounds  analysts and others paying close attention. For another, the performance of trading businesses is so dependent on market events in any given quarter that detailed prognostication is futile.

Here are some of the clues left in Goldman's release: The growth in FICC results was entirely a result of higher revenue in interest rate and credit products, while currencies and commodities posted lower net revenues. And the release contained a line that didn't exactly spur optimism: "Execution continued to operate in an environment characterized by low interest rates and slow global economic growth."

Trading Perks Up
Combined revenue from FICC and equities trading at Goldman Sachs reached the highest level since the first quarter of 2015

As for trading, some of the biggest outliers in recent years' quarterly revenue figures, both positive and negative, have stemmed from surprises: Switzerland abandoning the franc's peg to the euro in the first quarter of 2015 and China devaluing its currency in the second half of last year. 

So the third quarter may be most notable for a steady supply of tradable events but not too many shocks. 

"Maybe the best way to describe it is, it wasn't so much about tailwinds as it was about not having so many headwinds this quarter," Goldman Chief Financial Officer Harvey Schwartz said. "And it translated nicely for us."

Staying the Course
Goldman's commitment to fixed-income trading helped fuel a 47 percent increase in third-quarter earnings
Source: Bloomberg

Bond traders can exhale -- and maybe count on some better bonuses -- at least for now. The revival in revenue makes it look as if Goldman may have made the right call in not gutting staff as drastically as some competitors did during the trading slump. 

The fourth quarter may hold more of the same -- the coming U.S. election and potential Federal Reserve interest-rate increase by the end of the year should present plenty of reasons to trade. Absent any serious shocks to markets, the worst may be behind for trading desks. 

But to truly rev up the trading party, someone's going to have to show up with some higher rates and economic growth.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Michael P. Regan in New York at mregan12@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net