By Matt Scuffham

NEW YORK, (Reuters) – Wall Street’s trading business may shine in quarter one, as clients restructured their portfolios to respond to Russia’s invasion in Ukraine and rises in interest rates, executives and analysts say.

But quarterly results from banks including Goldman Sachs (NYSE:) and JPMorgan Chase & Co (NYSE:) will show a sharp decline in investment banking revenues and in first-quarter earnings overall. This is because companies are unable to complete deals while the stock markets crash stabilizes.

Banks had anticipated that trading volume would decline in 2019, after exceptional activity in 2020-2021. The Federal Reserve’s liquidity injections into the markets by the Federal Reserve to reduce the impact of the COVID-19 epidemic had been a boon for traders.

However, traders have enjoyed another boom period due to the Ukraine conflict, called a “specially military operation” by Russia, and multiple interest rate increases as the Fed tries to control inflation.

According to a senior New York-based banker, “There was definitely more volatility than we anticipated coming into the year”

The source stated that rates trading has been stimulated by uncertainty about the rate of central bank interest rate increases.

A senior executive from a European bank that has large U.S. operation said that his company’s trading business had experienced a “pretty remarkable quarter.”

“It was a very comparable trend to the one we saw last quarter in terms volume,” he stated.

The comparative challenges facing banks are extremely tough. Major equity indexes reached record heights in the first quarter of last year, which drove volumes. Analysts expect an identical performance to what was initially predicted, despite the fact that year-on year declines were expected.

Moody’s analysts (NYSE:) expect a rise in bank trading revenue that could “roughly mirror the extraordinary results of first quarter 2021,” according to a research paper.

Others still face headwinds. Christopher McGratty of Keefe, Bruyette & Woods estimates an 18% decline in trading revenues.

‘GOOD VOLATILITY’

Traders want to continue seeing “good volatility”, where clients are encouraged buy and sell securities, reshaping portfolios.

The – which is a gauge of the expected volatility in U.S stocks over the next 30 days – rose sharply during the first quarter. According to bankers, fixed income trading increased as clients hedged positions.

Rapid changes in asset prices could mean that banks can reap the benefits of increased trading volume as clients adjust their exposures. They also present risks, such as counterparty risk.

LME, London Metal Exchange was forced to stop nickel trading after the price of nickel doubled to above $100,000/tonne. This rise is blamed by sources who claim that it was due to inadequate coverage from one of the top global producers.

According to the New York-based bank executive, his company had been closely monitoring its commodity exposures and regularly testing clients’ liquidity.

The other downside to banks is a drop in investment bank fees, as companies put off deals. M&A advisory fees are expected to drop by 30-40%, analysts say.

According to analysts, equity capital market (ECM), issuance fell 70-80%. Initial public offerings were virtually stopped by the decline of major equity indexes.

Bankers state that the pipelines are healthy, and could see activity pick up rapidly if markets stabilize. Due to the decline in valuations from last year’s peak, it could encourage companies to buy. This could lead to an increase in the equity capital markets.

Devin Ryan, analyst at JMP Securities said that the first quarter saw a shift in operating conditions. However, there is still opportunity for the year ahead.