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What's going on?
On Friday, three of Americas biggest banks told investors how they performed in the third quarter and the news was quite positive!
What does this mean?
The better-than-expected profits were driven primarily by the banks trading businesses (e.g. stock, bond and currency trading) – especially for JP Morgan and Citigroup (the other, Wells Fargo, is in a bit of a special situation in the wake of its sales-tactic scandal).
Volatility, which means the degree to which the price of investments change, increased during the third quarter due to things like the unexpected Brexit vote and the Feds indecision over its interest rate policy. Investment banks (e.g. those with significant trading divisions) generally benefit during volatile times, as the price swings encourage clients to make trades in response to the changing value of their investments (and since the banks act as middlemen for clients, more trading usually means more revenue).
Why should I care?
For the market: These results show the benefits of a diversified business model.
Traditional banking businesses, like loans and mortgages, are struggling with low interest rates (which limit how much the banks can charge customers borrowing money). JP Morgan and Citigroup, however, have maintained a commitment to their trading divisions, despite all the turmoil in the markets since the financial crisis (this is especially true of JP Morgan). The diversification allowed the banks to offset weakness in traditional banking with some good trading results.
The bigger picture: Theres a lot of nervousness as earnings season kicks into full gear.
Over the next few weeks, most US companies will tell investors how they performed in the recent quarter. A lot is riding on the results: investors would really like to see profit growth return after the overall market suffered declining profits over the past four quarters. Fridays news was moderately positive, but after poor results from industrial companies earlier in the week, investors remain a little anxious.
Originally posted as part of the Finimize daily email.
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