Yesterday at the Deutsche Bank Global Financial Services Conference the biggest blockbuster announcement came from Citigroup which, following in JPM’s footsteps, announced that trading revenue could slide by 20%-25%. As such, this would mean that just like JPM, more of the big banks are setting up for the worst trading start in the first half of the year since the financial crisis. However, a far more important announcement came during the Keystone Presentation by JPM’s CEO of its Investment Bank, Daniel Pinto, who explained the reason behind this TBTF trading revenue slowdown, which also happens to be the explanation why the bulk of the hedge fund community is not profitable so far in 2014.
According to Pinto, a pair of wrong-way bets made by clients at the start of the year is partly to blame for Wall Street’s trading slowdown. Namely: the two mega-pain trades so far in 2014: being long USDJPY and short Treasurys which everyone had put on with mega-conviction at the beginning of the year, have so far in 2014 generated mega-losses for all those involved.
Bloomberg quotes Pinto who said succinctly summarized that “Neither of those trades paid.” He added: “Essentially you start the year with the wrong momentum, where you lose money at the very beginning, and you ended up with probably a lower risk appetite than you would have otherwise.” And, as a result of actually, gasp, losing money, “Clients appear to be hesitating in placing the larger hedges that typically happen earlier in the year.”
Imagine that: trading in size only when guaranteed profits in “right momentum” trades. So what happens to volume when the Fed fully walks away – one block of spoos moves the market by 1%?
More from Pinto: “You have episodic trades, big hedges, big corporate trades, that happen along the year,†Pinto said. “Particularly in the first and part of the second, the amount of those trades, even though the pipeline is very healthy, they haven’t happened. It looks like they are going to happen later in the year, and that is a big swing factor.”
