(FT) -- US banks with Wall Street operations are bracing for a slump in trading profits this year after the third quarter got off to a poor start, with global economic uncertainty and Europe's sovereign debt woes leading to a slowdown in market activity in July.
Executives said volumes and profitability last month were even lower than during the sluggish second quarter, with hedge funds particularly reluctant to take big bets on equities and debt.
Trading activity picked up a little in recent days after the release of European banks' "stress tests". However, deepening fears of a permanent end to the trading boom that supported financial groups' earnings after the financial crisis are prompting some banks to consider laying off traders.
"July was a miserable month for trading," one senior banker said. "If August and September don't rebound sharply, banks will be forced to cut jobs."
The squeeze in trading profits highlights the rising importance of groups' consumer and commercial banking operations, whose performance is improving as the economy heals.
Wall Street executives and analysts blamed the poor showing in July both on a fall in trading volumes as small investors, hedge funds and institutions sat on the sidelines, and on a squeeze in margins amid fierce competition among banks.
The lack of activity led many banks to miss internal targets for trading revenues in both fixed income commodities and currencies -- a key recent driver of profitability -- and equities.
"Across the majority of asset classes and exchanges, volumes in July have receded to generally the lowest level of the year," said Richard Repetto, an analyst at Sandler O'Neill & Partners. "While historically, activity can begin to slow in July, it is unusual to see an industry-wide retreat in volume like this in an earnings announcement month."
Federal Reserve data show that corporate bond transactions between Wall Street dealers and customers has been sliding since the end of June, running at $103bn, against $131bn in May.
Market watchers said the fallout from the "flash crash" in US equities markets on May 6, fears over the global economy and the run-up to Europe's stress tests prompted investors to move away from riskier assets.
John Brady, senior vice-president at MF Global, said: "A lot of the drop we have seen in trading volumes during June and July follows violent changes in markets during the preceding months."
Retail investors have also shunned stocks. US equity mutual funds have been hit by 12 straight weeks of outflows totalling $40.7bn, says the Investment Company Institute.