US-based investment banks including Goldman Sachs, JP Morgan and Morgan Stanley will begin to report Q2 earnings tomorrow, which Moody’s anticipates will showcase “more muted trading revenue” and mixed results in investment banking.
Ratings and research house Moody’s forecasts that sales and trading revenues will be lower both sequentially and year-over-year.
Secondary trading volume in equities, credit exchange-traded funds (ETFs) and options and futures on certain fixed income, currencies and commodities (FICC) products are expected to be more “muted” in Q2 2023 when compared to the first quarter of this year and the same time period last year.
Moody’s notes that volatility within the equity market reached a three-year low, resulting in improved financial conditions. However, a decline in volatility and bid/ask spreads paired with more subdued secondary trading volumes, is likely to lead to lower trading revenue.
Elsewhere, primary market issuance volumes were found to be mixed, with some equity and bond issuance rebounding from the first quarter of this year, while loan issuance and M&A activity was still subdued.
Industry issuance and completed deal volume – which Moody’s states are solid predictors of investment banking revenue – had mixed results over the last quarter, pointing to broadly similar or slightly lower aggregate investment banking revenue sequentially and year-over-year.
The total notional value of cash equities traded on all venues in Q2 2023 – which correlates to equity trading volume and client activity – was found to have declined significantly from near record levels in Q2 2022. Despite still reflecting robust figures, equity options volumes also declined sequentially from record highs.
Cash equity markets were found to have had significantly lower volatility and bid/ask spreads during the second quarter of this year, with Moody’s noting that average, minimum and maximum volatility during the quarter reached their lowest levels since the beginning of the pandemic.
“Volatility and spreads are positively correlated and can boost revenue for banks that are able to navigate the markets and provide liquidity. In contrast, lower volatility and spreads generally weigh on trading revenue,” concluded Moody’s in its report.