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Currencies and Fixed Income to Dominate Trading for Goldman Sachs

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Areas for growth

US broad market volatility (VIX) rose sharply towards 40 in February 2018 as panic selling started on valuations and rate hikes. The index has declined steadily since April 2018 and is now at around 12 to 13. As the Fed gears up to tighten policy further, buying in the debt-related offerings space isn’t expected to pick up in the upcoming quarters, so the segment could see lower trading income.

However, structured debt, currencies, and commodities are seeing higher volatility on monetary and trade policies. Goldman Sachs (GS) has successfully grown its trading income in fixed income, currencies, and commodities (or FICC) to $1.68 billion in the second quarter compared to $1.16 billion in the prior year. Other categories including equities, commissions, and securities have remained fairly stable.

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On a sequential basis, Goldman Sach’s trading income declined mainly due to a decline of 35% in equity-related trading, following a 19% decline in FICC. Citigroup (C) and Wells Fargo (WFC) command a heavy portion of their trading income from fixed income offerings. Any expectations of a slower rate hike could help augment their trading revenues in the second half of 2018.

China’s response

China has not responded directly to the Trump administration’s custom levies on imports from the region. However, it is seeking new trade treaties, giving financial support to the economy amid declining exports and indirectly weakening its currency. President Trump has alleged that countries are now resorting to currency wars, hinting at the mainland. These events are making the forex market jittery and have resulted in some easing of the strengthening dollar.

Investment banks (XLF) including Morgan Stanley (MS) and Goldman Sachs can benefit from such volatility and improve their trading income by deploying various trading strategies.

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