Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.
In some sense, a technical default has already taken place. I write this because the mere threat of default (coupled with the ongoing government shutdown, naturally) has already harmed confidence and business performance. One prominent example of this can be found within the latest round of earnings from universal banks Citigroup (C 3.06%) and Bank of America (BAC 2.06%).
Yesterday afternoon, Citigroup missed analysts' estimate for third-quarter earnings: The $3.2 billion the bank posted fell significantly short of the $3.5 billion forecast. One business that contributed heavily to the shortfall was fixed income markets, where revenue fell roughly $1 billion relative to the year-ago quarter -- a 26% decline.
In addressing the matter, Citi CFO John Gerspach said the prior-year quarter was particularly strong, whereas the most recent quarter had felt the sting of "uncertainty around the timing of Fed tapering, the pending government shutdown, and other geopolitical events."
It's always worth taking explanations like these with a grain of salt: Corporate executives are often eager to point the finger at external factors to explain poor performance. Furthermore, Citi's peer, JPMorgan Chase, did not show a comparable decline in activity; last week's earnings report showed fixed income markets' third-quarter revenue declining just 8% "compared with a strong prior year."
However, this morning's results from Bank of America appear to confirm the effect Citigroup referred to. Although B of A managed to beat the $0.18-per-share consensus estimate by $0.02, the bank was not helped by a 20% drop in fixed income, currency, and commodities revenue to $2 billion. The justification provided by Bank of America? It sounds familiar: "Lower market volumes arising from concerns around monetary policy as well as political uncertainty domestically and abroad."
None of this bodes well for Goldman Sachs (GS 3.30%) and Morgan Stanley, which report tomorrow and on Friday. Goldman, in particular, depends heavily on bond trading: Its fixed income, currency, and commodities client execution unit contributed 30% of the bank's net revenue during the first six months of this year.
What is bad for these banks doesn't appear to be worrying the market this morning, however. We're within 24 hours of the Treasury's deadline for raising the debt ceiling with no agreement, yet the S&P 500 and the narrower, price-weighted Dow Jones Industrial Average (^DJI 0.67%) are up 1.15% and 1.17%, respectively, as of 10:20 a.m. EDT.
