Hammer Time!

The global stock markets are taking a beating after U.S. president Barack Obama launched his latest regulations on the banks and financial institutions. The big banks may be forced to sell investment units and their income will probably suffer substantial cuts. Investors are selling off financial stocks all over the world as the dollar takes another turn down .

“Authorities are certainly treading a fine line between curbing bubbles and choking off economic growth”

Jim Reid

(Article in English)

Financial stocks are dropping and the dollar weakens on concern that President Barack Obama’s plan to rein in banks will dent U.S. earnings.

The U.S. markets dropped about 2 per cent thursday, the Asian markets fell 2,5 and Europe is down 1 per cent on average friday at noon.

U.S. government plans to restrict proprietary trading triggered declines of more than 6 percent in JPMorgan Chase & Co. and Bank of America Corp. yesterday.

Financial companies contributed all of the anticipated growth in S&P 500 earnings in the fourth quarter, according to analysts’ estimates.

In addition China’s central bank will raise interest rates by the end of June and increase banks’ reserve requirements, according to the median forecasts of 17 economists surveyed by Bloomberg.

“Authorities are certainly treading a fine line between curbing bubbles and choking off economic growth. It’s clear that politicians are starting to have enough confidence that the global economy has been saved,” Jim Reid, the London-based head of fundamental strategy at Deutsche Bank AG, writes in note to investors.

Obama’s own words

Here’s the U.S. president’s own words on the latest reform proposal:

“Similar to the Glass-Steagall”

“This is similar to the Glass-Steagall Act, which says that the financial institution can not carry both brokerages and banking operations at the same time,” economist Shakeb Syed at Handelsbanken Norway writes in his morning report.

The Glass-Steagall Act was created in the wake of the crash in 1929 and lasted until 1999.

“Many believe the repeal of Glass-Steagall is a central cause of the financial crisis, we do not disagree with this,” Syed writes.

Another goal is to prevent banks from becoming “too big to Fail”.

Obama is proposing a ceiling on bank’s size in relation to the financial sector‘s total size, more specifically that no bank can own more than 10 percent of U.S. deposits and assets.

The Norwegian economist is not sure  if the limit also includes derivative positions, which he fundamentally believes should be regulated better.

“As we all know;  large,  risky and messy derivative positions was an important cause of financial crisis.”

“Imperative regulations

Sayd believes the market will continue to react negative as more regulations are proposed.

“In the long run, to develop a sustainable financial sector, better regulation is imperative. Note that we say better, not necessarily severe.”

“By the way –  remember that this is only a proposal to be voted in Congress.”

Market Snap Shots

U.S. markets:

Standard & Poor’s 500

(Relative Strength Index and On-balance Volume Indicator)

European markets:

DAX Index




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