Bank earnings: A key indicator for Wall Street is pointing up

Jefferies’ earnings, which precede Wall Street banks, show a massive rise in bond trading revenue.

After a rough start to 2016, things may finally be looking up for Wall Street's investment banks.

Jefferies Group, the investment bank owned by Leucadia National, reported fiscal second-quarter earnings Tuesday — and it appears one of the biggest factors to trip up big banks in first-quarter earnings may be off the table when Wall Street firms report their results next month.

The fixed income division at Jefferies posted revenue gains of more than 55 percent, year over year, and far outpaced its previous quarter's tally, which — in line with the rest of Wall Street — proved disappointing. Jefferies' total sales and trading operations garnered a 21 percent revenue increase, the bank said, to more than $462 million.

Indicator dial
Vincent Mundy | Bloomberg | Getty Images

The fiscal second-quarter results reflect "better equity and fixed income secondary trading conditions," CEO Rich Handler and executive committee Chairman Brian Friedman said in a statement that accompanied the earnings.

Jefferies is viewed by analysts as a bellwether for bigger Wall Street investment banks, because its operations are similar to theirs (though less so for consumer banks). The bank's earnings period is slightly different from that of Wall Street investment banks. Jefferies' most recent quarter concluded May 31, while the big banks' fiscal second quarter will conclude at the end of June.

After Jefferies' disappointing revenue from trading the previous quarter, other Wall Street banks also posted ugly quarters for their fixed income, currencies and commodities operations, when they reported earnings in April. Banks effectively had to cut their way to profitability amid poor performance by trading desks in a turbulent market to start 2016.

But Jefferies' earnings may be the beginning of Wall Street putting a rough start to the year behind it. The bank is also bullish looking ahead, and is adding bankers to bolster its advisory unit.

"Our third quarter investment banking backlog is showing encouraging improvement," the executives said. "We believe our industry is experiencing yet another fundamental and strategic inflection point."

The bank declined to provide additional comment when contacted for this story.