Tuesday, May 18, 2010

Market Update at the Close- Is the Sky Falling

Market Update – selling pressure picked up into the afternoon as risk aversion became the popular trade – gold surged off its lows and Treasuries staged an impressive rally.  What caused the weakness?  Once again, it’s hard to point to any single specific catalyst today; rather, this is a continuation of the selling trend that has been in place really since back in Apr when the SEC charges were handed down against Goldman.  Today, the tape had a neg. bias really since the open – there was no real buying behind the early rally while the retail stocks traded poorly despite decent earnings (see ANF, HD, SKS, etc).  The Dodd bill, even though it has been in the headlines for weeks, is still managing to hit financial stocks hard.  There is a growing sense that the legislation has few safety nets as it barrels through Congress and that a bunch of onerous amendments are going to wind up being attached (there have already been a bunch of surprises when it comes to amendments getting passed).  Reid today said he has the votes to end debate on the bill while Sen Corker said at least 4-5 Republicans are going to wind up voting for the final package (the late day passage of the Carper amendment is nice, but not a huge deal for the financials; it retains existing laws permitting the federal gov’t to override state laws but actually hands state AGs some new powers; the last big amendments to watch are Levin and Whitehouse).  In addition to the Dodd process, the SEC was due to unveil new market-wide circuit breakers later today (according to Reuters, the new circuit breakers would apply to all sp500 stocks and would be implemented on June 7; ETFs would be exempt).  On the European front, things were pretty calm this morning and the region’s equities markets actually closed pretty strong.  However, after the close Germany’s Bafin announced new short selling restrictions (inc. banning naked CDS trading), contributing to a significant sell-off in the euro and worldwide risk assets (see below for more on the euro).  Bigger picture in Europe, the underlying issues haven’t gone away - there is the concern that the steep budget cuts being implemented will the knock the region’s economic growth (Spain today said it would probably wind up trimming it’s ’11 growth b/c of the steep budget cuts). 

The G20 finance ministers will be meeting on Wed to discuss this problem (the extent to which budget cuts will imperil economic growth).  The budget cut issue could be offset by a major QE program out of the ECB, although it hasn’t demonstrated (at least for now) the inclination to go down this road (a lot of people think the initial EU16.5B worth of bond purchases by Trichet & Co, revealed yesterday, was a rather tepid initial showing and many doubt the ECB’s resolve when it comes to buying assets).  Out of China, equities bounced small, but fears of a slowdown remain. 

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