Trading volumes take a hit from U.S. impasse, to hurt banks

10/14/2013

* Fall in FX volumes estimated at 5-15 percent

* European stock activity down 19 pct, bonds down 15 pct

* Muted trading set to hit banks' revenues

By Anirban Nag and Toni Vorobyova

LONDON, Oct 14 (Reuters) - Trading volumes across financial markets have fallen in the first two weeks of October as uncertainty over the U.S. fiscal impasse saps investor appetite, boding ill for banks' fourth-quarter revenues.

Many asset managers and speculators who were wrong-footed by the Federal Reserve's surprise decision in late September to stick to its bond-buying programme were banking on the final three months of 2013 to make up for some of their earlier losses.

But the latest cliff-hanger being played out in Washington and a real threat that the United States could default on its debt have made investors cautious, confining banks, hedge funds, insurance and pension funds to the sidelines.

As a result, trading activity has fallen, with participants estimating volumes have dropped 5-15 percent in the currency market - the world's most liquid financial market with up to $5 trillion a day changing hands.

In Europe, stock market activity has fallen by nearly a fifth while volumes in German government bond futures - a proxy for trade in the benchmark 10-year cash Bund - dropped 15 percent last week compared with the previous one.

"It is as dead as a door nail," said Peter Kinsella, strategist at Commerzbank referring to the volumes in the currency market. "Traded volumes are lower by 10-15 percent in the first few weeks of October than usual."

Vincent Craignou, global head of FX and Precious Metals Derivatives at HSBC, one of the top banks in the currency market, agreed volumes have been on the low side.

"Anecdotally, it is very quiet with the U.S. debt ceiling problems keeping many institutional investors on the sidelines."

CLS Bank, which operates the largest foreign exchange settlement system, declined to comment on October numbers. The latest data from the bank shows that while the average daily trading volume picked up to $5.05 trillion in September from $4.5 trillion in August, it was well below a record high of $5.6 trillion in June and down 2.7 percent from a year ago.

HITTING TOP LINE

Foreign exchange trading volumes soared in the first half. A massive monetary easing programme in Japan triggered widespread yen selling and expectations the Federal Reserve would scale back its monetary stimulus led to dollar buying. However, activity has since tapered off and shows no sign of picking up.

"It is correct that the currency market is much quieter in the first two weeks of October than before," said Kenneth Dickson, Investment Director at Standard Life, which has $271 billion of assets under management. "Unless there is a solution in the U.S., investors will hold fire."

Without a solution banks' earnings from trading activity in fixed income, currencies and commodities (FICC) will be hurt.

Deutsche, Citi, HSBC and JPMorgan are all major players in FICC and depend on increased volumes and volatility to make gains from trading activity.

JPMorgan unveiled on Friday an 8 percent drop in revenues from trading in fixed income markets in the third quarter from a year earlier.

Deutsche is set to report revenues from FICC trading falling by more than a third in the same period while Barclays, another big bank, has warned of a sharp slowdown in trading bonds and other instruments.

Some see the uncertainty dragging on volumes and hurting banks' top line growth in the fourth quarter.

"There is no getting away from the fact that third quarter was difficult and I think the outlook for the fourth quarter is uncertain. September, October, November are certainly important months for banks," said Michael Symonds, credit analyst at Daiwa Capital Markets.

"The likely continuation of the political deadlock and uncertainty through the end of November is a cause for top line revenues concern."

Trading volumes on the EuroSTOXX 50 index of euro zone blue chip stocks dropped from an average of nearly 70 billion shares a day in the week Oct. 2 to 56.8 billion in the following week, or a drop of 19 percent.

Volumes in Bund futures slipped to 2.9 million lots last week from 3.4 million the previous week, although this was well within the range of the past five months.

"Investors are just not participating since there is no clear view," said Howard Jones, partner at RMG Wealth Management. "Until then the markets will go nowhere."



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