Obama, The Banks and the Stock Market

Obama, The Banks and the Stock Market

Robert Thomas

So the UK finally came of out recession when the GDP numbers were released in early 2010. This should be a positive.

UK unemployment seems to have peaked, retail sales look like they are picking up and even manufacturing seems to be more optimistic. Note that the last point is more difficult to believe as the official numbers are still showing a failing sector.

Those who like to trade the currency markets will also have noticed that the weakness of the Pound is becoming less easy to depend upon. UK house prices are also supposed to be going up.

On the other side of the pond, Barak Obama has been looking to stop, or at least severely limit, the activities of the bank propriety trading desks. This anti-bank rhetoric looks to be rather ill informed though. The fact is that the banks themselves are particularly cautious when it comes to their propriety trading units.

The public feeling of ‘risk taken for its own sake’ is quite extreme. Aside from the odd rogue trader, the losses made by banks over the past few years have had nothing to do with the trading units.

We have seen politicians making many populist edicts against certain banking divisions that have done little to deserve such approbation. The reason banks make so much money is that everyone wants what they offer, in a word, money.

Investment banks make enormous sums because they are the only ones willing to risk such large amounts on funding. They are the only ones able to source funding for large speculative propositions. They naturally charge through the nose for the facility. They are banks after all.

The past few years has seen the demise of many of the investment banks. Recent times have also seen increased wariness from the banks that were looking to get into the ‘investment’ space.

When this sort of thing happens in any market then the profit margins of the few remaining companies shoots up. Goldman Sachs are currently operating in a world where most of its competitors have disappeared. At the same time, their clients are still desperate for funding. Not surprisingly the investment banks are making vast sums.

As Simon Denham of Financial Spread recently commented, “Obama’s reaction is not helping. Removing the liquidity that the banks provide from the various exchanges will not solve any problems. If anything it will actually create more issues. With less liquidity, vast sums of money will move the markets far more than they might have done in the past.

“If restrictive US legislation goes through then we could see a considerable increase in market volatility. That’s good for the market makers but not so good for investors”.

Obama’s comments have naturally had a negative effect in the markets although many investors have seen the opportunity. Especially those who missed out on the late 2009 / early 2010 market rally. The more recent sell off may have been premature.

Nevertheless market makers will probably need to stay alert to any other innocuous statements from the senior US administration for the next few months.

Perhaps the recent sell off is a one off, but at the back of everyone’s mind is ‘what if’. What if the 2009 rally was a massive trap for investors? What if the incredible deficits built up across the West drag us all back into the mire?

Looking at the markets more positively though, we have experienced a series of sudden falls of pretty much the same magnitude in June/July 2009 and again in October 2009. All such falls have been defeated and seen swift moves to new highs.

A well respected financial spread betting journalist. A seasoned writer he offers insight into strategic and tactical trading of stocks and shares, forex and index spreads.

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