Coffee highs come from volume lows

Great news for cafes and restaurants in London’s Square Mile. Even before the first leaves of autumn begin to fall, it seems both the buy- and sell-side are already winding down for 2012. A high-ranking sell-side trader I spoke to last week told me brokers aren’t expecting institutional investors to do any major equities deals for the rest of the year and that business will be quite subdued until January.

With most developed markets up double digits (Eurostoxx 11.27% ytd, S&P500 17.98% ytd), barring any unforeseen developments, not a lot of people are expecting them to climb much further. So buy-siders are thinking if they caught that 14% bump, they’ll lock in the gain. And if they missed it, they’ll wait the year out by working on their strategies for 2013.

According to my coffee-loving sell-side pal, that will mean we’re likely to see stagnant volumes in the cash equities markets – and that’s after three months where European volumes only rose above €40 billion on a couple of occasions, compared to high of €80 million in the same period last year. This will make trading tricky, because even smaller events could cause bigger waves.

Bulge bracket brokers will be able to cope with this scenario but smaller houses are staring down the barrel of another tough quarter.

Another sell-side broker says across the Atlantic, most US hedge funds are unsurprisingly underweight European equities. He says hedgies aren’t likely to try and outperform this year if they have already hit their benchmark. But unlike their European counterparts, he says if these US firms haven’t hit their benchmark they’re not going to just wear it. Instead they will try to find some significant event to get them over the line.

What could spur the buy-side back into action? Tom Lee, J.P. Morgan Chase’s chief US equity strategist, thinks stocks still have a little way to climb leading up to the US November election results and there could be a spike on the other side, depending who wins.

“We see a ‘melt-up’ into Election Day,” he wrote in his latest report, saying he thinks the S&P500 will exceed 1,495 short-term.

Lee says despite lagging economies in Europe and Japan, global growth will pick up, with a “US durable goods boom larger than the 1990s”.

And what does the market think about a Mitt Romney White House versus a second Barack Obama administration? “The market prefers a Romney victory… Obama is base case.”