It is shaping up to be an ugly earnings season for Wall Street – and some of the blame can go to Ben Bernanke.
Citigroup Inc. released earnings that missed expectations for the third quarter, burdened by weakness in fixed-income trading, where revenues fell 26 per cent from the same period a year earlier.
That makes Citigroup the second major U.S. bank – the other being JPMorgan Chase & Co. – to report a slump in the trading of bonds, interest rates and currencies, an area that is a linchpin for profits at such firms. JPMorgan reported a drop of 8 per cent in bond-trading revenue in the third quarter from the same period a year earlier.
The sluggishness in bond trading at two of the world's largest financial institutions suggests that other major banks – Bank of America Corp., Goldman Sachs Group Inc., and Morgan Stanley – may follow a similar pattern when they release their results later this week.
Two main factors weighed on bond trading in the third quarter, analysts say. July and August are normally a time of muted customer activity but last summer business was brisk, setting up a tough basis for comparison this year.
But the more important factor was the surprise about-face by the U.S. Federal Reserve, which is chaired by Mr. Bernanke. For months, investors had expected the central bank to dial back – or "taper" – its bond purchases. Instead it chose to maintain its buying at the current level. The doubt surrounding the decision depressed the appetite for trading, Citi said.
The bank's latest results "reflect the challenging operating environment, including a slowdown in client activity based on uncertainty regarding Fed tapering," said Michael Corbat, its chief executive, in a conference call on Tuesday.
Mr. Corbat also sounded a cautionary tone when discussing the prospects for the rest of the year. "Transitioning from a lower to higher [interest] rate environment doesn't happen without causing disruptions, especially in the emerging markets and we're clearly seeing evidence of that," he said.
What's more, the uncertainty over Fed tapering is ongoing, he added, keeping many investors on the sidelines, possibly "for an extended period of time."
The bank discussed the impact of slowing activity by clients on its trading revenues, but did not mention another possible contributor to the weaker-than-expected results – trading losses.
"It seemed like everybody was positioned for the anticipation that tapering would begin," said Gerard Cassidy, a banking analyst at RBC Capital Markets. "If you're a dealer preparing for that event, you probably took some losses as you unwound those positions."