Donald Trump’s convincing election victory sparked a rally in US bank stocks on Wednesday. Goldman Sachs saw its shares appreciate by 13%, JPMorgan rose 12% and the KBW Nasdaq Bank Index was up by 11%, while some regional banks posted even bigger gains as investors anticipated the impact of lighter regulation in a second Trump administration. Bank stocks comfortably outperformed a broad market rally that saw the S&P 500 close up by 2.5%.
There are plenty of reasons for optimism about the prospects for bank revenues after Trump’s return to power, though inflationary policies that push up Treasury yields could test the balance-sheet management skills of firms such as Bank of America.
The biggest Wall Street dealers received a boost to their fourth-quarter trading revenues from the approach to the US election, and investor demand for fresh position-taking in the aftermath of the results is expected to remain strong.
Some of the most popular Trump 2.0 trades increased fixed income dealing volumes in ‘macro’ products such as foreign exchange and rates trading that had been relatively weak for most banks in the first half of this year.
Bets on a stronger US dollar and weakness in currencies, such as the Mexican peso, fuelled FX client activity for dealers. There was also keen interest in more complex option-based FX trades from hedge funds and other sophisticated investors, including attempts to take advantage of rising volatility ahead of the election to boost the performance of directional currency bets.
Treasury exposure
A rise in rates volatility was also a boon for banks. The MOVE Index of Treasury volatility hit a fresh high for the year as voting took place on Tuesday and heavy dealing volumes bolstered market-making revenues.
The potential for inflationary Trump policies such as tax cuts and trade tariffs to drive up long-dated Treasury yields in bearish curve-steepening marks one area where banks will have to carefully manage their own exposure while benefiting from market-making volumes. Wall Street firms will have to hope that investors do not become concerned about unrealised losses in banks’ own government bond holdings, for example.
The shift towards a laxer US regulatory environment for banks is unlikely to arrive in a smooth or predictable way
BofA remains the most exposed of the big US banks to government bonds, with US$568 billion of held-to-maturity securities – mainly mortgage-backed bonds and treasuries – reported in its most recent earnings release at the end of the third quarter.
A sustained rise in yields could reawaken questions about the pace at which BofA is reducing this exposure, which peaked at US$683 billion three years ago and has been coming down in increments of around US$10 billion in recent quarters.
So far, investors seem comfortable with the way BofA is managing its balance sheet. And the Treasury sell-off seen during the day after Trump won re-election only took the benchmark 10-year Treasury yield up to 4.43% – which was just below the level it touched on June 1 after Joe Biden’s disastrous debate performance first led global investors to conclude that a Trump return was highly likely.
A sustained rise in Treasury yields and signs of disorderly markets would probably be needed before confidence in the exposure of leading US banks to government bonds became an issue.
Regulatory targets
A bigger risk may be that investors are over-estimating the impact of lighter regulation on bank revenues and failing to price in the risks involved in expected future Trump policies, such as aggressive tariff impositions, that could disrupt global trade.
“The move in bank equities seems to imply no regulation and no Basel III [revised bank capital rules], with everyone pricing in a Goldilocks scenario,” one New York hedge fund manager tells Euromoney. “I am curious about what happens when we actually have tariffs.”
The shift towards a laxer US regulatory environment for banks is unlikely to arrive in a smooth or predictable way.
Some regulators who are viewed as hostile to banks may well be replaced as soon as the next Trump administration begins. Consumer Financial Protection Bureau director Rohit Chopra is expected to be dismissed immediately, for example, according to bank analysts. Securities and Exchange Commission chair Gary Gensler will also probably resign rather than attempting to serve out a term that officially extends to 2026.
Overt hostility towards the Federal Reserve by Trump or his proxies could shake confidence in US capital markets
But Federal Reserve chair Jerome Powell – who has already made notable concessions to US banks over Basel III implementation – could resist any attempt to force his departure before the end of a tenure that is also scheduled to continue until 2026.
And overt hostility towards the Federal Reserve by Trump or his proxies could shake confidence in US capital markets.
A complete abandonment of Basel III capital reform implementation in the US might also place US banks at a temporary disadvantage relative to European and Asian competitors if there is a race to the bottom in terms of capital requirements.
That might be a fleeting advantage for non-US banks, but it would underline a point that often seems to escape the heads of Wall Street banks when they complain about their regulatory burdens: global confidence in firm and fair US regulation, including substantial capital requirements, is a main source of their long-term success.
Potential benefits
As a shift towards lighter regulation across industries in the US gets under way, there are nevertheless clear potential benefits for banks that should translate to higher revenues.
The recent boost to sales and trading revenues in fixed income and equities dealing may subside after a while, but dealmaking, including mergers and acquisitions, is likely to pick up pace.
This anticipated rise in activity was reflected by the outperformance on Wednesday in the shares of Goldman Sachs and Morgan Stanley, which are the two firms most geared to capital markets volumes among leading banks.
Technology stocks led by the ‘Magnificent Seven’ US corporates have driven much of the strong performance of US equities this year.
A diminution of the anti-trust focus by Biden administration officials after the return of Trump could help to prop up share prices for the biggest technology firms and boost M&A activity in the sector, as big companies feel emboldened to buy smaller competitors.
That, in turn, could help to finally deliver a recovery in a global IPO market that has been languishing for years, with a related boost to income for the biggest Wall Street banks, and the remaining European and Asian banks that compete for new deal mandates.
The Goldilocks scenario for US banks following Trump’s election victory may not be fully realised, and there are many reasons for concern about the eventual global economic impact of policies, such as higher trade tariffs.
But Wall Street firms seem certain to be beneficiaries of the emphatic Trump victory in the near term.
