A boring day was put into a bit of a spin by Obama’s sudden decision that ‘proprietary’ trading by banks was an evil force that must be curbed. Stocks in the major investment banks went into a spin as the implications seeped into the market’s consciousness.
Of course this is one of those areas that politicians consistently rail against but which is actually rather difficult to quantify. A trader ‘market making’ for his bank/investment house and adding liquidity to the market might easily be said to be ‘proprietary’ trading. At what point does a trade become a ‘voluntary’ as opposed to ‘involuntary’ action and how on earth would a regulator identify it.
But the real problems would occur if the regulators extended this ban to stopping banks providing credit and margin lending to Hedge Funds and the like who definitely do proprietary trade (if a bank is not permitted to prop trade itself how can it lend or provide margin and/or credit limits to its clients who do) and if this is removed what of the recent tendency of pension and investment funds etc to provide margin cover to hedge funds to prop trade on their behalf?
The big speculative markets might well experience a swift and nasty bump to the downside.
President Obama’s oft mentioned ‘change for the better’ in politics seems to be running full tilt into waning public popularity and, as with politicians since the dawn of time, the knee jerk reaction is to enact some ill-thought out, shooting from the hip, populist legislation. So much for a ‘new dawn’ in politics! For the last year or so the desire of the politicians and regulators to ‘punish’ those they believe responsible for the financial crisis has always been self defeating. If you want growth you must not only have ‘responsible’ lending which is safe and easy for everyone, you also need ‘risky’ lending from banks and private equity willing to take a punt on a person or product. The West risks scrapping the very tools which oil the wheels of our economies.
The FTSE gave up some 140 points in the afternoon mayhem as all the world markets wilted and commodity markets went into reverse.
The FTSE is now below the 5375/5400 resistance level which dominated November through to late December and unless we can swiftly regain the higher range there is a good chance that the next few months will be dominated by this barrier once again. If we are back in the old range there is room to the downside to 5180/5200 to the support which has held firm (bar one attempt) since early October.
The support for the US markets might depend on how much of the rally has been built on speculative margin trading which ‘might’ be put under pressure from the regulators if the ‘thoughts of Chairman Obama’ are actually enacted. The falls yesterday were quite minor in the great scheme of things and major supports were not even remotely challenged although the long term bull trend line in place since last March in the Dow and S&P was broken on Wednesday at about 10630 and we have dropped about 250 pips in both since then. If this breach is confirmed then we have the potential for a Fibonacci Retracement of a further 650 points in the Dow and 80 big figures in the S&P.
The Euro continues to weaken but yesterday it dragged the Pound along with it as Europe came in for an all round bashing. Sterling/Yen had one its days to forget as we plummeted from 148.50 down to the current 145.80. Support at 145.40 has held but the Yen seems to have suddenly found some supporters and dealers will have to watch for a break of this level. Pressure on the 139/141 support area might open us up for a move back towards the lows of early last year.
Cable continues to batter around in the same old trading ranges of the last eight months and support at 1.6140 mentioned a few days ago held (just about) yesterday and we bounced off it twice in exciting action. Comments from many analysts who seem to have suddenly found hitherto unsuspected strength in the UK economy will be in the minds of many traders as the weak public sector borrowing position coupled with good growth would translate into much higher interest rates…and whisper it quietly but a stronger pound as well.
Gold continued to suffer as the Dollar rebounded but the weakness was not quite enough to challenge the lows of last month just yet. Readers will know that we have been less than enthusiastic about the yellow metal recently but even with the 135 buck fall from the highs we have not actually challenged the major trend supports. The medium term support is at 1075 (approximately) and the longer term one way down at $750. Before this we run into huge resistance to the downside at $1025 and $860. The bull move momentum is still very much in place but the arguments are getting harder to justify.
Movements in China to possibly limit the current growth spurt might hit prospects for commodity demand and prices weakened on the news. With growth so strong in the Asian area, though, it might take rather more than nominally higher interest rates and tighter bank lending requirements to slow down and this would call into question the appetite for the harsh braking effort required especially so soon after the huge urban layoffs of 2008/09. it would not be wise to call the end of the base metal and resource rally just yet.