Big banks warn that Fed-induced market volatility is coming soon
By Kathi on Oct 15, 2021 | 04:35 AM IST
Market volatility has dipped
since September, but the nation’s top bankers are warning that choppiness could
be coming back soon — thanks to the Federal Reserve.
In earnings calls this week,
executives at the largest U.S. banks said price swings could be back as the
central bank attempts to slow (and then reverse) its easy money policies
launched last year to insulate the economy from the effects of the COVID-19
pandemic.
“It's good to be watchful
right now,” Morgan
Stanley (MS) CEO James Gorman told analysts on Thursday. “There's certainly
nothing that suggests there are any issues, but markets are bouncing a little
bit. And over the next 18 months, we'll see more of that as the Fed starts to
move.”
The VIX, a key measure of
market volatility, has drifted below 2020 levels as the Fed gradually
communicated its intention to begin slowing its so-called quantitative easing
program as early as next month. Once the Fed kicks off that process, it will
reduce its $120 billion-a-month pace of U.S. Treasury and agency
mortgage-backed securities purchases. Looking ahead, Fed officials are also
talking up the possibility of the first interest rate hikes in late 2022.
Citigroup (C) CFO Mark Mason
told reporters Thursday morning that volatility through the Fed’s pullback may
be a good thing.
“All of those factors play
into investor positioning,” Mason said. “As investors look to position based on
that volatility, that creates an opportunity for us to make markets for them.”
Through the pandemic-ridden
quarters of 2020, banks relied heavily on their trading desks to find arbitrage
through market volatility. Fixed income, currencies, and commodities (FICC)
trading was a particular point of strength, as banks with experienced capital
markets businesses notched double-digit growth to compensate for weak loan
activity.
The economic recovery is
building optimism among the large banks that they can grow the pipeline for
bread-and-butter consumer and business loans. But some bank analysts say that
through the transition, money center banks should remain winners among the
financial stocks.
“We’re still leaning toward
the capital markets sector banks because the capital markets construct is
better than the consensus realizes at the moment,” JMP Securities Senior
Research Analyst Devin Ryan told Yahoo Finance Thursday.
Minutes from the Fed’s last
meeting show that if the Fed were to go forward with “tapering” those purchases
in November, it could begin the process in the weeks following and bring the
purchases to a full stop by the middle of next year.
Through that process, the Fed
has acknowledged the risk of a sour market reaction. Fed officials in September
hoped that the strategy of inundating markets with advanced notice on any
pullback in quantitative easing would “reduce the risk of an adverse market
reaction to a moderation in asset purchases.”
Wells Fargo (WFC) CFO Mike
Santomassimo told reporters Thursday he feels the Fed will be able to avoid any
“abrupt” movements in markets.
“Tapering isn’t going to be a
surprise to anybody, I think we’ve been talking about it now for quite a long
period of time,” Santomassimo said.
Even if market volatility
surfaces, the bank executives noted that monetary policy changes are unlikely
to rock the boat on loan and deposit growth. JPMorgan Chase (JPM) CFO Jeremy
Barnum said Wednesday that deposit growth likely won’t reverse until the Fed
starts to actively unwind its asset holdings — a conversation the Fed is far
from having at the moment.
Even when the Fed starts to
hike interest rates, deposit costs may not dramatically rise. Bank of America
(BAC) CEO Brian Moynihan said Thursday that in its consumer businesses, 56% of
balances are in “core transactional,” non-interest-bearing checking accounts.
“We feel good about long-term
deposit growth,” Moynihan said, shrugging off the impact of changes in the
monetary supply.