UBS Reports Net Income Up 40% As Market Volatility Leads To Higher Trading Volumes

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UBS reported Tuesday a 40% increase in profit for the first quarter of 2020 on the year before, helped by higher trading volumes as market participants reacted to the volatility of recent months.

Net profit attributable to shareholders came in at $1.6 billion in the three months to the end of March, up from $1.1 billion in the same quarter of 2019.

Here are some other key metrics from the results:

Operating income came in at $7.9 billion versus $7.2 billion a year ago
Common equity tier 1 ratio (CET1) — a metric of bank solvency — was 12.8% versus 13% a year ago. Return on tangible equity — a metric of profitability — hit 12.8%, compared with 9.8% a year ago

“We saw a huge pick up in client engagement, despite the logistical challenges. We see that clients are more and more looking for advice,” Sergio Ermotti, UBS’s chief executive officer, told CNBC’s Squawk Box Europe.

Turbulence in the markets helped UBS’s investment bank post the biggest jump in operating profit, across the all the business divisions, on the year before. Operating profit before tax rose to $709 million from $207 million at the end of the first quarter of 2019.

Within investment banking, UBS attributed a 44% rise in revenue in its global markets division to “significantly higher volumes and volatility, particularly in Foreign Exchange, Rates and Cash Equities revenues, reflecting the impact of the COVID-19 pandemic on client activity levels.”

Its global wealth management division also increased its operating profit before tax over the last year to $1.2 billion from $863 million. However, invested assets fell to $2.3 billion.

The results come at a time of significant pressure for banks, as the coronavirus pandemic has brought the global economy to a standstill.

The Swiss bank said the coronavirus had “dramatically changed the global economic outlook,” adding that it foresees disruption to many businesses and higher unemployment as a result. Given this, UBS is expecting higher levels of credit loss expenses for the financial sector.

Speaking to CNBC Tuesday, Ermotti said it was “very difficult to make predictions about any quarters going forward.”

“January, February and March were all profitable months,” he said, adding that the bank will seek to be “flexible” in dealing with upcoming challenges.

UBS said earlier this month that it will suspend half of its 2019 dividend payout until later this year, after pressure from Swiss regulator FINMA. The bank’s chief executive officer, Sergio Ermotti, said earlier this month that it was too early to discuss 2020 dividend plans.

UBS’s share price has dropped around 30% over the last 12 months. In February, the bank announced that Ralph Hamers will be taking over as chief executive officer on November 1.




Investors Bet on Volatility Comeback in 2020

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A better-than-feared corporate earnings season and swinging sentiment on U.S. and China trade talks have helped lift stocks to fresh records in recent weeks, pushing volatility lower. A number of factors make next year’s outlook rockier, leading some investors to pay up for hedges that would protect against a downturn well into 2020, according to Wells Fargo Securities.

“It could be the market pricing in a ’Phase 1 trade deal’ event (either the signing of, or postponement/cancellation of) at some uncertain point in the near future, or it could be the residual memory of the Q4 selloff last year,” wrote Pravit Chintawongvanich, an equity derivatives strategist at the firm in a note Friday.

Markets were calm until late last year, before spiraling into a selloff that dragged the S&P 500 into negative territory for the year.

The sentiment is evident in an options measure called skew, which gauges how expensive it is to buy bearish put options versus bullish call options expiring six months from now. The measure is near its highest level of the past five years, the firm said.

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Put options give the right to sell shares at a specific price, later in time. Calls give the right to buy stock at a designated price. “The market also seems to think things will pick up in the new year,” wrote Mr. Chintawongvanich.

The higher volatility would be a sharp shift. The Dow Jones Industrial Average finished unchanged for only the third time since 2000 last week. The Cboe Volatility Index, an options-based measure of market swings, hit the lowest level since April this month.

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The Next Test For The Stock Market Begins This Week

◊ Stock Market News Today ◊ … The second-quarter earnings season begins in earnest, with Citigroup Inc., JPMorgan Chase & Co., Netflix Inc. and others giving investors an early look at how some of America’s biggest companies are coping with tepid economic growth and billions of dollars in tariffs.

Stocks have busted through records recently, rising thanks in large part to dovishness from the Federal Reserve. The central bank has positioned itself to cut interest rates this month for the first time since the financial crisis.

Investors’ outlook on rates has helped equities outdistance weaker growth around the globe that has been crimped by a continuing trade dispute between the U.S. and China, the world’s two biggest economies.

Now a bleak outlook for corporate earnings is being added to the mix. More than 80 S&P 500 companies warned that their second-quarter financial results will be weaker than initially expected, including online-streaming giant Netflix, software maker Adobe Inc. and industrial conglomerate Honeywell International Inc., according to FactSet.


That is more than usual, analysts said, and puts the broad index at risk of facing its first period of two or more consecutive quarters of declining earnings since 2016. Analysts predict second-quarter earnings will contract by 3% from a year earlier, which would be the biggest earnings decline since the second quarter of 2016, according to FactSet.

Other investors say despite downbeat estimates, they expect second-quarter earnings to be flat compared with this time last year, if not a little higher. Analysts tend to be conservative with their earnings estimates, making it easier for companies to beat lowered expectations. This happened in the first quarter, with earnings contracting just 0.3% rather than the 4% analysts predicted at the end of March. Twenty-four companies in the S&P 500 have already reported, and 20 of them have beaten estimates.

“Even though the stock market is at an all-time high, expectations about earnings is very low. That sets you up for a very good market response to earnings,” said Andrew Slimmon, senior portfolio manager with Morgan Stanley Investment Management.

So far, the prospect of the Federal Reserve cutting interest rates sometime this year has given investors an incentive to buy stocks. The S&P 500 has climbed 20% this year, rallying on days central-bank officials suggested it would slash rates to help the U.S. grow despite trade tensions and a shaky global economy.


That happened this past week, when Fed Chairman Jerome Powell sent a strong signal to investors during two days of congressional testimony that a cut could come as soon as this month. This year, major stock indexes have hit records for the first time since the fall, after more than recouping what they lost during a fourth-quarter rout last year.

Volatility Measures In Markets Have Retreated This Year … A Sign That Investors Are Shedding Caution

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Volatility measures in markets from stocks to currencies have retreated this year—a sign that investors are shedding caution even as uncertainties linger in the global economy.

A measure that tracks expected turbulence in share prices, the Cboe Volatility Index, this week hit its lowest point since Oct. 3, placing the so-called fear gauge back at a level it reached before U.S. stocks descended into the worst quarter in seven years. The options-based index, known as VIX, tumbled 3% this week to 14.46. The measure is down 43% in 2019.

A measure of Treasury market volatility also fell to its lowest level since early October. The Merrill Lynch Move Index has dropped 11% this month as of Wednesday, according to data provider Refinitiv.

The expectations of calm are a shift from last year, when outsize price swings in U.S. government bonds triggered tumult in other markets. This year, comments from the Federal Reserve that it will slow its pace of interest-rate increases have capped volatility across markets and buoyed share prices.

“The depth and intensity of December’s market correction and volatility spike came as a shock to investors,” Alain Bokobza, head of global asset allocation at Société Générale SA, said in a note this week. Now, “a mere two months later,” he wrote, “what looked like a very bad omen in December seems to be being viewed as a minor statistical disturbance.”

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Measures of swings in assets from oil to currencies also have fallen. However, some market observers say that investors shouldn’t get complacent. Estimates of the risk of a recession have increased. This week, S&P Global Inc. economists said they forecast a 20% to 25% chance of recession in the U.S. within the next year, up from 15% to 20% in November. Wells Fargo Securities estimates the chances of a recession within the next year are about 40%.

And potential market hazards remain: The U.S.-China trade dispute has yet to be resolved, investors are increasingly concerned about the economic health of China and Europe and the Fed could still resume rate increases. But investors seem to be breathing a sigh of relief. In another sign they are back to embracing risk, wagers that the market will continue to be quiet—bets against volatility—have climbed.

Data from the Commodity Futures Trading Commission as of Jan. 29 show that speculative investors like hedge funds have steadily increased net bearish bets on stock volatility this year, after slashing them all throughout the fourth quarter.

Such bold trades were widely popular ahead of February 2018, when a sudden resurgence in market turbulence caught many investors off guard. Some market watchers said the short-volatility trades exacerbated violent swings in the market at the time.

Société Générale’s Mr. Bokobza warned that the heightened turbulence last year—notably in February and December—is a sign of how quickly market shocks can return. “Two such volatility flares in less than 12 months is no coincidence,” he wrote in the note. “It would be unwise to dismiss December’s volatility spike as a one-off.”

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Investors should be careful as the recent spike in market volatility is far from normal, according to the manager of the California State Teachers’ Retirement System

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Investors should be careful as the recent spike in market volatility is far from normal, according to the manager of the California State Teachers’ Retirement System, which has more than $200 billion in assets.

“The last few days have been abnormal volatility,” Christopher Ailman, chief investment officer at CalSTRS, told CNBC during a special aired Thursday night. “The volatility we saw earlier in October and November, I went on and said that was expected. That’s typical when you have a bull market that’s so old and so late in the economic cycle. But the last few days are abnormal because the machines are really picking over more than human beings.”

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Ailman’s comments came after another wild session on Wall Street. The Dow Jones Industrial Average closed 260 points higher on Thursday, erasing a 611-point plunge from earlier in the day. Thursday’s rally also follows a historic day in the U.S. stock market Wednesday, with the bluechip index posting its biggest one-day points gain in history.

Those moves took place after Wall Street logged its worst Christmas Eve performance ever on Monday. “That’s normally a quiet day and that was crazy to see that decline,” Ailman said.

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Investors have been on edge lately as they worry about a possible monetary policy mistake from the Federal Reserve, an ongoing U.S. government shutdown, U.S.-China trade talks and a possible economic slowdown.

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But Ailman says investors should look at the bond market for clues about the economy rather than stocks.