Light at end of the tunnel

Jefferies Group just reported results for its first quarter, and the numbers shed a little light on how tough it has been, and the extent to which trading conditions are getting better.

The investment bank reported a net loss of $167 million for the quarter ended February 29, after a challenging period through January and February. 

Here’s Jefferies executives explaining, in a statement (emphasis ours):

A quiet December was followed by an extremely challenging January and first few weeks of February.  Almost every asset class, including equities and fixed income, suffered significantly amid concerns about the pace of global economic growth, outflows from the high yield market, forced selling from hedge funds, uncertainty over China, a potential Brexit, and an overall void in liquidity.  New issue equity and leveraged finance capital markets were virtually closed throughout January and February, which resulted in many of our potential Investment Banking capital markets transactions being postponed until some stability returns to the markets.  

Business Insider has written about these dynamics plenty. Morgan Stanley, JPMorgan and Citigroup have all sounded the alarm over first quarter trading conditions, with the latter two forecasting double digit declines in sales and trading revenue. Corporate bond trading has been especially challenging. 

Investment banking revenue, or fees from equity and debt deals and mergers and acquisitions, are forecast to fall by 25%. 

The challenging start to the year is especially noteworthy, as a big chunk of trading revenues are usually booked in the first quarter. Industry executives have questioned whether banks will be able to make back the lost revenue later in the year. 

One factor that may help is the recent improvement in trading conditions. Jefferies chief executive Rich Handler and executive committee Chairman Brian Friedman cited record-breaking inflows into high-yield funds, a pick up in equity prices, and an uptick in the oil price.

It is unclear how big a factor this rebound will play in the first quarter results, but it is clear that trading conditions have improved. Here are Handler and Friedman again (emphasis ours):

While we are early in the second quarter and one can never predict the future, it appears markets have not only stabilized, but aggressively snapped back.  Bank holding company stocks in the US and globally have halted their sell-off, high yield inflows have been at record levels, hedge funds appear to have stabilized, equity markets have rebounded, and energy/commodity prices have improved significantly.  We are experiencing mark-ups in our block equity positions and believe there may be potential upside in the value of the loans held for sale in Jefferies Finance should the current market tone continue.  Our core businesses are performing well, with total sales and trading net revenues for the first ten trading days of our second quarter averaging above our recent periods’ mean results, and our investment banking backlog is stronger.

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