It has been a choppy trading day so far, with Wall Street dipping below the coveted 10,000 mark before rebounding on the back of a rally in the banking sector, which emerged unscathed from last night’s financial reform bill.
Obama’s sweeping financial reform bill was passed in the US Senate yesterday – but banks seem to have dodged a bullet. Some of the key resolutions to be passed include a new consumer financial protection bureau to be set up inside the Fed, derivatives trading to go through a clearing-house, proprietary trading to be banned from deposit-taking institutions and the government being able to step in and wind up large institutions that face impending failure. The bill needs to be reconciled with existing legislation before it is signed off by President Obama and made legal.
While the legislation was aimed at protecting consumers from bearing the brunt of any future collapses, in my opinion the measures, in their current form, may be equally beneficial for banks since it would help limit certain risks without substantially damaging earnings growth. According to the Wall Street Journal, the current reforms are expected to erode the sector’s future earnings by roughly 20%, but financial institutions have a great track record at adapting to whatever regulations are thrown at them, so this ballpark figure may actually be significantly less than expected.
Indeed, the banks seem to be happy with the ‘blow’ dealt to them: shortly after Wall Street opened Goldman Sachs rallied 1.76% to $138.50, JP Morgan Chase jumped 1.35% to $38.34, Morgan Stanley gained 0.66% to $25.81 and Bank of America spreads edged 0.33% higher to $15.35.
By 3.45pm (London time) the Dow Jones Industrial Average was 5.21 points (+0.05%) higher at 10073.22, the broader S&P 500 was trading 3.44 points (+0.32%) higher than its previous close at 1075.03, while the tech-heavy NASDAQ 100 added 9.80 points (+0.54%) to 1809.92.
The Wall Street Journal reported that a contributing factor to yesterday’s ferocious sell off was due to the closure of the so called ‘pro-growth’ trades – a strategy which is thought to be employed by some large macro hedge funds. Pro growth trading strategies involve going ‘long’ on risky assets that benefit from global economic growth and being ‘short’ traditional safe-haven assets such as US Treasury’s and Japanese yen.
In recent weeks the markets have turned, encouraging ‘pro growth’ traders to close out on their positions to lock in profits, thereby sparking the recent sell-off.
Judging from the reaction in the market so far, it seems as though the recent sell-off was overdone. ‘Technically speaking we’re very oversold – really that’s the understatement of the year,’ said Walter Todd at Greenwood Capital. ‘I’d rather be buying now than I would three weeks ago. Everybody had talked about all the cash that was on the sidelines, now you’re seeing people nibble at it.’ [1]
Energy majors resumed their descent today, as crude oil prices remain depressed at $70.27 a barrel. Exxon Mobil was 0.56% lower at $59.99, Chevron lost 0.69% to $73.09, while ConocoPhillips retreated 0.59% to $50.63.
Dell was the worst performer on the S&P 500, shedding 5.87% to $13.48, after unveiling disappointing profit margins. ‘Gross margin came in at 7.6%, below expectations of 17.9%, despite a favorable enterprise mix where it looks like Dell got hit harder on rising component costs than Apple and Hewlett-Packard,’ said Kaufman Bros analyst Shaw Wu in a research note. [2] Meanwhile, the company’s first-quarter profits jumped 52% to 22 cents a share, and 30 cents when excluding certain one-off items. Bloomberg’s median analyst estimate was 27 cents a share.
Also in the technology sector, Google unveiled plans to enter the television market with ‘Google TV'. The rather risky venture will be in conjunction with Sony, which will build the TVs, and Intel, which will produce the processing chips. The idea is that you will be able to utilize Google’s search engine through the TV, and access both live and recorded content that is available through the internet. The venture opens the door for Google to tap into the $70 billion TV advertising market, while for Sony it presents a new opportunity to have access to new technology. Judging by the share price, Google shareholders seem to be wary of the move, with shares in the stock slipping 1.94% to $465.80, while Sony’s ADR on the New York Stock Exchange rose 3.91% to $31.87.
Source: [1] Bloomberg news (21 May 2010), [2] Marketwatch (21 May 2010)
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'Spread Betting News 21 May 2010', Article by IG Index, last update: 21-May-10
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