What gives with capital markets? The S&P 500 is essentially at an historic high, but the sell-side and most of the buy-side are miserable.
The complaints fall into two camps: 1) Lack of volatility is killing the trading business, with volumes continuing to decline, and 2) the capital markets business is terrible — both IPOs and even the secondary market are not as strong as they should be, given the markets are at new highs and we're still stuck with low rates.
They do have a point.
On the capital markets business, if there is any time to issue lots of stock, this would be it. And yet global deal volume has been disappointing — with IPO activity down about 50 percent this year compared to the same time last year. In fact, this may be the worst year for IPOs since 2009.
A lot has been made of the secondary market, but that's no better. The number of secondaries is down 32 percent while the dollar value is down 29 percent year-to-date, compared to the same period last year, according to Dealogic. So far, this is the worst year for secondaries since 2010.
What gives? There are two obvious problems:
- Technology and Biotech IPOs have dropped off because private valuations remain high. We all know that tech IPO sponsors prefer to either a) sit on their rich private-market valuations, or b) sell out and collect their profits immediately. And why shouldn't they sell out? Low interest rates make it easy to borrow, and there's plenty of excess corporate cash.
- The oil nosedive last year crushed any new issuance for Energy.
But there seems to be more to it than that. There's a general malaise floating around, with some blaming it on macro uncertainty — specifically on the oil collapse, the yuan devaluation in August 2015, and most recently, Brexit in June.
Declining trading volume has been a complaint for several years, but it's not getting better. On Tuesday, Intercontinental Exchange, owner of the NYSE, released August trading volumes which were generally below analyst estimates.
ICE trading volumes (YOY)
- U.S. cash equities down 26%
- U.S. equity options down 36%
- Commodity futures ADV down 8%
- Financial futures down 1%
Source: Sandler O'Neill
These are particularly notable declines in cash equities and options. A part of this could be due to tough comparisons — August 2015 had big volume in the last week due to the yuan devaluation, but volumes were generally weak month-over-month as well.
Sandler O'Neill's Richard Repetto, who has been the ax in this space for years, promptly lowered his Q3 earnings estimate by $0.08 to $3.28 (consensus is $3.31), but also lowered estimates for all of 2016, 2017 and 2018.
Traders are pinning their hopes for more volume and volatility on three factors: 1) seasonality, since volatility traditionally rises in September and October; 2) Fed rate hikes; and 3) the presidential election.
Traders are certainly counting on all of the above. The VIX futures curve is much steeper today than it was a month ago. The cash VIX is 12.2, but the October futures contract is 15.9, while November is 17.2.
One final point: While trading volumes have been disappointing, shares of both ICE and NASDAQ have been hovering near historic highs this week. This is largely because both firms have diversified their revenue sources. Both have seen revenues growing due to data services. And both have successfully grown their global derivatives businesses as well.