Jan 22, 2021

Axios Markets

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🎙“The riches of the game are in the thrills, not the money.” - See who said it at the bottom of the newsletter.

1 big thing: Banks cash in as Wall Street blows out Main Street

Illustration: Aïda Amer/Axios

America’s big banks capped off a winning year, led by soaring Wall Street-facing business lines.

Why it matters: Banks cashed in on the white-hot IPO market, record debt issuance, and sky-high trading volume — all of which played out as economic peril softened the consumer side of their businesses.

The big picture: Banks made a killing thanks to unprecedented action by the Federal Reserve that caused a rush of activity in financial markets, pushed a slew of companies to issue debt, and led to a flood of others to go public for the first time.

The other side: There's been a drop-off in loan demand from consumers and mom-and-pop type companies, who are less eager to borrow (or can't) as the pandemic runs its course.

  • Even during the holidays, typically a strong time for spending, credit card lending fell by 0.2%, according to Fed data analyzed by FactSet.

By the numbers: JPMorgan, the country’s biggest bank, posted its best-ever profit in the last three months of 2020 — boosted by its corporate and investment bank, which set a divisional record for annual revenue.

What they're saying: Big banks’ “trading results don’t totally match up with what’s happening in the real world, but they do reflect macro trends that are happening,” says Mark Doctoroff, co-head of the Financial Institutions Group at MUFG.

  • At Citibank, revenue at the trading and investment banking business line also had a record-breaking year. In one sign of consumer softness, credit card spending fell 7% in Q4 from 2019 — though it was among the highest levels seen in 2020.
  • Bank of America said its equities trading business had the best year since 2009.
  • Morgan Stanley, less exposed to Main Street, said its trading desk had the strongest revenue growth in over a decade. Trading revenue at Goldman Sachs hit a 10-year high.

Flashback: The 2020 story is an about-face from the prior year when banks said strong consumer activity made up for lackluster trading desk volumes.

Read the full story.

Bonus chart: Bond trading desks' comeback
Data: Analysis of company filings; Chart: Axios Visuals

Big banks’ bond trading revenue has been slowing for years. The pandemic helped to pull fixed income, currency and commodity (FICC) divisions out of the doldrums.

By the numbers: Revenues collectively rose to roughly $68 billion in 2020 — the highest level in at least 10 years, according to an Axios analysis of filings.

  • Goldman Sachs said FICC revenues rose 57% compared to 2019, helped by a record level of financing revenues.
  • Morgan Stanley said its desk posted the highest revenues in over a decade.

What happened: Trading volume surged as investors rushed into safe-haven assets as the coronavirus hit financial markets, as the Fed’s intervention in credit markets also boosted investment banks.

Yes, but: Bond trading activity slowed for some players like Bank of America in the last quarter of the year, as Bloomberg notes.

  • What they’re saying: Strong credit trading "was more than offset by declines across most macro products and mortgage trading," Paul Donofrio, BofA's bank's chief financial officer, told analysts this week.

Other banks missed analysts' high expectations: Morgan Stanley and JPMorgan were the only big banks to top Wall Street’s FICC forecasts.

2. Catch up quick

President Biden’s executive actions set to be issued today include telling the Labor Department to "consider clarifying" whether workers who refuse unsafe working conditions can still collect unemployment insurance. (Axios)

New unemployment claims fell to a still staggeringly high 1.4 million last week, levels not seen since mid-summer of last year. (New York Times)

China imported $100 billion of the U.S. goods last year — only 58% of what it committed to buy as part of Trump’s “phase one” trade deal, according to a new analysis of customs data by think tank PIIE. (CNBC)

3. Signs of a more liberal Biden

Illustration: Sarah Grillo/Axios

Dion Rabouin writes: President Biden talks like a soothing centrist and promises to govern like one.

  • But early moves show that Biden is keeping his promise to advance a liberal agenda.

What’s going on: Biden is handing out bureaucratic public positions with impressive titles like Treasury Secretary to "old-timers" like former Fed chair Janet Yellen, says Joseph Trevisani, senior analyst at FXStreet.

  • "But the power positions, where vast changes can be effected with a rule or regulatory change, are going to the younger officials like Rohit Chopra," Biden's choice to run the Consumer Financial Protection Bureau.

That, coupled with a WSJ report that Biden was set to name former Obama Treasury official Michael Barr as Comptroller of the Currency, a major bank regulator, looks like the continuation of a more progressive trend.

The other side: The center of the party has been shifting left for years, and Biden just moved with it.

  • Executive actions so far have largely rolled back parts of Trump's legacy.

What to watch: Biden wants to have his cake and eat it too, says Jaret Seiberg, financial services and housing policy analyst for Cowen Washington Research Group.

"That will work in the short-term, but eventually those progressives who are taking over key jobs will impact the regulatory environment. Changes will be more dramatic than what the market may be expecting based on Biden’s cabinet picks and other top advisers."
4. Bubble watch
Data: BofA Global Research; Note: Percentage of investors that cite respective events as concerns; Chart: Axios Visuals

Fears of an asset bubble are gaining ground among investors, Bank of America surveys out this week show.

Why it matters: The coronavirus is still the top fear. But there was the biggest jump among investors that mentioned "asset bubble" as a concern.

By the numbers: 48% of credit investors cited it as a worry this month, compared to the 18% who said so in November (the last time BofA conducted this survey).

  • Inflation saw the second-biggest jump: it's mentioned by 42% of those surveyed, up from 17%.

On the equities side: Fund managers said in a separate BofA survey the COVID-19 vaccine rollout was the biggest market risk. Others include a bond market "tantrum," a Wall Street bubble and inflation.

5. Clean energy’s stock boom
Data: FactSet; Note: XOP is an exchange-traded fund (ETF) of U.S.-based oil and gas stocks. ICLN is an ETF of global clean energy stocks. Chart: Axios Visuals

Axios’ Amy Harder reports: Clean energy stocks have blown past their last high in the mid-2000s, which came down during the 2008 financial crisis.

  • The stocks held up during this crisis despite the pandemic crushing economies everywhere — and the oil industry.

The intrigue: The Trump administration was slow in reviewing several proposed clean energy projects across the Eastern Seaboard, but Biden has signaled he will move swiftly here.

Keep reading.

🙏 Thanks for reading. Dion's back in your inbox on Monday.

Quote: "The riches of the game are in the thrills, not the money."

Who said it: Baseball legend Ernie “Mr. Cub” Banks, after hitting his 500th home run in 1970.

  • Banks was the Chicago Cubs’ first Black player. He hit five grand slams in a single season in 1955 — a major league record that was unbeaten for 30 years.
  • Tomorrow marks six years since his death.