US banking reforms a major sell signal for global stocks?
Posted on 23 January 2010 with no comments from readers
Seldom has a more clear equity sell signal been made than President Obama’s move to ban proprietary trading by the banks. For at a stroke this will remove one of the biggest players from the financial markets, and probably the biggest since the financial crisis.
And yet there is good logic in what this well intentioned man says. Banks should not be using their depositors money to gamble on financial markets, especially if they use knowledge gleaned from upcoming client transactions to make trades that can not lose.
Ultimate insiders
If you look at the vast amount of money that banks have been making around the world from proprietary trading – that is their own hedge funds, private equity and even foreign exchange desks – then any observer from Mars would sniff insider trading writ large, how could it be anything else?
The trouble is that taking the biggest player out of a market is not going to be good for the health of the same said market. And it certainly is very bad news for the players concerned. Doubtless the banks will fight congressional legislation to the last dot and comma, but the game is clearly up.
This surely means that the game is also up for bank stocks whose miraculous recovery from the nemesis of March last year has surprised many, and is almost certainly due in part, if not large part to proprietary trading by the banks.
Shorts up
Indeed it was surprising that banking short positions did not edge even higher on Friday. FAZ, the x3 leveraged S&P bear financials ETF was up by nine per cent.
But this presidential announcement has the power to be the finger pulled out of the dyke that is the global rally in equities since last March. Things have hardly been looking good thus far in 2010 with stocks ending lower for three weeks in a row.
Yesterday Professor Nouriel Roubini warned of a sell-off in global stocks in the second half because he saw a double-dip in profits in that period. But the good professor is no stock market trader. Markets look at least six months ahead, and they are beginning not to like what they see.
