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Net Net: Promoting innovation and managing change

For banks, September to remember in trading

Adam Jeffery | CNBC

What is historically the worst month for the stock market may turn out to be the third quarter's best month for traders, and that could be good news for the nation's big banks.

"September makes it or breaks it," analyst Jeff Harte of Sandler O'Neill said, referring to the month's impact on the third-quarter trading results for the likes of Goldman Sachs and Citigroup.

So far, there have been several encouraging signs suggesting September's activity across different product lines has been stronger than expected. After the typical August lull, and following what some industry watchers describe as a moderate July, September could provide a positive catalyst for the banks' third-quarter trading results.

"Oil, rates and foreign exchange picked up in September from August," said Barclays analyst Jason Goldberg, who also noted debt and equity issuance has been pretty good, and that should have a positive impact on trading.

Still, questions remain about whether it will be enough to offset a very slow August.

Among the other reasons to be optimistic about trading revenue in September: The stock market's history-making run, a record $21.8 billion initial public offering from China's Alibaba, and a pickup in short- and intermediate-term interest rates as investors position themselves to respond better to a Federal Reserve that appears ready to push interest rates higher as soon as economic data allow. Lastly, there is strong activity in corporate bonds.

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"Industry-wide activity so far in September has also bounced sharply from a slow August, with investment grade trading activity up 25 percent from August, and high yield up 34 percent industry-wide respectively," financial services firm Keefe, Bruyette and Woods wrote in a note.

At the Barclays Global Financial Services Conference earlier this month, bank CFOs expressed caution on the trading environment.

JPMorgan Chase's CFO Marianne Lake said the bank expected a decline in trading revenue in the back half of the year, though it would be less than in the first half. Citigroup's CFO John Gerspach said the bank expected trading revenue to be stable year over year, but the final results would hinge on what happens in September.

In the banks' favor as they close out the third quarter are relatively easy comparisons from last year.

While equity trading was decent, the 2013 third quarter was a tough one for FICC, or fixed income, commodities and currencies. Questions surrounding the Fed's plan to wind down its asset purchase program, along with the threat of another government shutdown, kept investors on the sideline and crushed volumes and volatility. Goldman Sachs, which derives more than 40 percent of its revenue from its trading arm, saw revenue in FICC decline 44 percent from the previous year.

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For Marty Mosby, director of bank and equity strategies at Vining Sparks IBG, the key to improved trading revenues for the banks will depend largely on results in fixed income trading.

"We've seen higher levels (yields) up to the five-year part of the curve," Mosby said. "The longer end hasn't moved much."

Mosby wonders if the change on the short end of the curve is enough to get some investors off the fence and back into the markets.

"That will turn things around," he said.

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