![Overnight, Goldman Sachs showed that it also had been a beneficiary of the Brexit bonanza.](/content/dam/images/z/t/1/g/3/image.related.afrArticleLead.620x350.gs5e1z.png/1476844936912.jpg)
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The big US investment banks may be blessing Brexit for helping to boost their massive trading profits, but it's doubtful they'll be as joyful if it ushers in a period of massive market upheaval.
Overnight, Goldman Sachs showed that it also had been a beneficiary of the Brexit bonanza, reporting quarterly earnings of $US2.1 billion ($2.7 billion) for the third quarter, up 47 per cent from the same period last year.
Much of this lift in income reflected an outstanding performance by the group's fixed income, currency and commodity (FICC) trading division, where revenues jumped 34 per cent to $US1.96 billion (excluding an accounting adjustment).
But Goldman isn't the only major Wall Street bank to profit from the increased market volatility following the shock British vote to leave the European Union in late June.
At JP Morgan Chase, trading revenues from its FICC unit climbed a staggering 48 per cent from a year earlier to $US4.3 billion, and both Citigroup and Bank of America also enjoyed a rise of at least one-third in their FICC revenues.
The big question that bank investors are asking is whether these stronger trading revenues will last, or whether central bank policies – including ultra-low interest rates and massive bond-buying programs – will once again dampen market volatility, which stifles trading revenues.
The more bullish analysts believe that big banks can look forward to a sustained lift in their bond, currency and trading revenues.
They point out that market competition has declined because many of the big European banks – including Deutsche, UBS and Credit Suisse – have scaled back their trading operations.
What's more, they argue that markets are likely to become more unsettled, because the world's major central banks are now beginning to question the side-effects of their massive monetary stimulus programs. Financial markets, they argue, will inevitably suffer turbulence as central bankers withdraw their monetary largesse.
In addition, analysts point out that the repercussions from the Brexit vote are far from over because the UK faces an arduous negotiation period regarding its EU exit, which is sure to provide plenty of market excitement.
But others believe that, in their excitement at seeing some renewed market volatility, investors are woefully under-estimating the scale of the potential risks that lie ahead for financial markets.
'We fear a storm is coming'
Contrarian hedge fund manager Hugh Hendry has sounded an ominous warning in his latest investors newsletter, saying that the British vote suggests we are nearing "a dramatic fulcrum point" which could see other EU members seek to break away.
"Remember, just two years after the UK similarly rejected the gold standard back in 1931 there were just 12 remaining members versus the 45 that had previously been committed", he wrote.
"So we have the precedent from a much earlier time (the 1930s) when the defection of just one member from a currency union caused the system to unwind rapidly".
Hendry warns that the situation is extremely unstable. "We can clearly sense the seeds of another popular political revolt in other member countries; a flurry of upcoming elections and referendums [in Italy, France and Germany] provides an immediate catalyst."
Hendry warns that the eurozone isn't only at risk from political upheaval. The European Central Bank is also in a quandary with its monetary policy, as a prolonged period of low interest rates has squeezed the profitability of European banks.
"Put simply, keeping rates low enough to fix the economy under the current framework seems to consign the banks to the dust heap of meagre earnings in perpetuity," he writes.
But if the ECB allows long-term interest rates to rise in an effort to boost bank profits, this "would tighten policy in the real economy, kill off any nascent recovery and condemn the continent to further penury and the resulting surge in populism that a lack of economic hope engenders".
Hendry argues that faced with these conflicting objectives the ECB has chosen a monetary policy which is "undoubtedly the worst of both worlds – we have populist rebellions and bad banks".
As a result, he warns, "we fear a storm is coming".