Why Morgan Stanley owes its fixed income success to climate change

If your seasonal chocolate stupor started on Thursday, you might have missed Morgan Stanley's results. You might still think Morgan Stanley is a failure at fixed income sales and trading. You might think Goldman Sachs is a special place which pays fixed income traders in Bugattis, or derivations thereof.

If this is you, then wake up. Smell the coffee, drink some hydrating fluids, and look at the chart below. Produced by the analysts at Bernstein Research in the U.S., it underpins what the rest of the world knows already: Morgan Stanley had a huge first quarter in fixed income, currencies and commodities (FICC).

What most people don't know, however, is that Morgan Stanley's excellent quarter in fixed income was underpinned by the recent climatic turbulence in the U.S.

Fixed income trading performance of major banks, Q1

Source: Bernstein Research

The cold American winter did it

Morgan Stanley owes its big Q1 beat in fixed income sales and trading to the unprecedentedly cold winter in North America.

The commodities business drove the increase in Morgan Stanley's first quarter fixed income revenues. As Bernstein's researchers point out, Morgan Stanley is a leader in power trading. When the polar vortex took hold in North America in January, electricity and gas prices spiked. Bernstein says Morgan Stanley benefited in the following ways:

• The bank owns 'peaking power plants' and can sell its power to local market operators at times of high demand.
• When Morgan Stanley sells its 'peaking power', it gains important information about supply and demand and can pass this on to its power trading desk.
• Morgan Stanley's power trading desk can trade real-time power and execute deals for clients based upon its superior knowledge.
• At times of peaking power prices, clients also want to hedge against price changes. Morgan Stanley's power traders can help here too and benefited from the increased volume of transactions.

To prove their point, Bernstein's analysts include the following list of Morgan Stanley's North American power plants:

Source: Bernstein

They also drop in the following graphs of energy prices in the first quarter.

Source: Bernstein

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