Morning Coffee: Traders have a major opportunity to buff bonuses for Q4. Deutsche results a reminder that it’s not just about revenues

Different risks hit differently depending on where you’re sitting.  For the M&A and advisory franchises of the big banks, the second half of 2024 is looking like one to forget.  Every time the market looks like opening up again, something happens, and the long awaited return of the financial sponsors clients gets postponed for another quarter.  In two weeks’ time there are going to be Presidential elections, with a decent chance that uncertainty and litigation will drag on for a while after.  And then it’s December, when no deals ever get done; the revenue year has all but finished.

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Sales and Trading divisions, however, have a lot more to look forward to.  For them, it was the first half of the year that was disappointing, but now there’s a lot more clarity about the macro outlook and Fed rates policy.  And uncertainty is by no means a bad thing for a trading desk – it gives clients a reason to change their minds, and it scares off faint-hearted market makers, leaving more market share and wider spreads for people who think they can handle the risk.

Which means that sensible Managing Directors won’t have been approving any extended half-term holidays for their fixed income traders; it’s going to be all hands on desk for the week beginning November 3rd.  Deutsche CFO James von Moltke has already predicted that “Usually we see strength around the US election as investors and also corporates need to position”, and his equivalents all over the Street will be giving pep talks to the troops. Barclays said something similar today. 

And it’s not just about cancelling holidays.  It would be quite bad to lose half your short-term interest rates team for a compliance webinar at a crucial moment, so several banks have rescheduled training schedules, offsites and employee town halls to make sure that the desks are at full capacity all through the day.  As well as the normal newswires, junior staff are apparently being assigned to monitor Reddit for rumours, and it’s quite likely that human resources will be encouraged to stretch a point when it comes to the rules about making the Analysts go out to fetch coffee.  And this won’t just be happening in New York – political news has this habit of happening outside market hours, so the European and Asian desks will also be on highest alert.

These are the times that people end up reminiscing about – not only can they create some of the most insanely profitable trading days of a career, they also give limitless opportunities to screw up badly and get on the wrong side of a market move.  As well as having the potential to rescue the year’s bonus pool, markets like this are fun.  If you’re getting ready for a fortnight of “Trump trades”, don’t forget to enjoy yourself.

Separately – but entirely related, to the extent that we’re wondering about the endgame in terms of 2024 FY bonus pools – the Deutsche results gave us a strong reminder that there are a lot of moving parts in a bank’s profit and loss account, and that it’s entirely possible for everyone to have a great quarter ruined by the effects of decisions taken years ago. 

That’s almost the story of Deutsche Bank this quarter – it outperformed all its peers in trading, saw capital markets fees up 24% and beat analyst expectations, but the share price was down nearly 5% on the day, because of a substantial increase in bad debt writeoffs.

According to von Moltke it wasn’t as bad as it looked – there are some items relating to Postbank, and a single big “corporate restructuring event” which is now “significantly hedged”.  But the real question is about the overall exposure to commercial real estate, and this is by no means a Deutsche specific issue.  In fact, while Deutsche thinks its “underlying” default rate isn’t worsening, most of the big US banks have very large exposure to a sector that looks very troubled indeed.  And some of them still have LBO debt from the Twitter acquisition.

This certainly might interact with the rest of the business. There’s nothing more demoralising than working your guts out, only to see all the money disappear in a black hole of credit losses.  But that might make bankers want to accelerate deals rather than delaying them, if they fear that next year might be worse.

Meanwhile …

Although the details of HSBC’s reorganization are not going to be completely available for a while, the general shape is leaking out. Georges Elhedery has confirmed that some senior staff will be targeted for cuts.  It might be difficult to keep an “until then, business as usual” approach over the next few months for some heads and co-heads. (Bloomberg)

More moves at Citi as Vis Raghavan continues to reshape the business.  Three MDs in the European DCM team (Colm Rainey, Christian Rose and Santhi Athreya) are leaving, with three or four other ranks also being cut. (Financial News)

Sam Caley, the Managing Director responsible for leading Deutsche Bank’s cloud implementation project in the UK died in June after losing his way on a mountain in Wales and falling. (BBC) 

Back when computers used magnetic tape, John McQuown was one of the first ever quants. (FT)

“Hiring externally often comes at a premium, due to higher compensation and recruitment fees”.  So DWS has doubled the size of its graduate intake and begun “juniorisation” and internal mobility programs to try to fill as many vacancies as it can from within the building. (Financial News)

The municipal bond underwriting market is a sort of microcosm of how market shares have been shaping up over the last few years; as risk averse incumbents have pulled back, previously secondary players like Jefferies and Truist have ramped up. (Bloomberg)

Falling prices, increasing purity, greater social acceptability and (possibly) the influence of “Industry” have driven an epidemic of cocaine use in Britain. There were 1,118 deaths involving cocaine last year, 80% of them men. (FT)

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