Obama takes on banks

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Stocks tumble as Obama takes on banks

By Jamie Chisholm, Global Markets Commentator.

Published: January 21 2010 08:24 | Last updated: January 21 2010 17:56

17:35 GMT. Stocks dropped sharply on Thursday as President Barack Obamasaid he intended to prevent deposit-taking banks from undertaking any proprietary trading.

The president said he wanted to end the mentality of "too big to fail" in financial markets. "If the banks want a fight, it's a fight I'm willing to have", he added.

The FTSE Global Banking index fell 2.3 per cent and the S&P 500 plunged 1.8 per cent as investors feared the proposal would batter investment banking earnings and signalled the administration was getting increasingly tough with Wall Street.

Shares in Goldman Sachs, the investment banking bellwether reversed an initial 2 per cent advance on stronger-than-forecast headline earnings, to fall more than 5 per cent.

Mohamed El-Erian, chief executive of Pimco, told the Financial Times: "Today's announcement is part of the broader phenomenon of de-risking banks, and moving the sector more towards the ‘utilities' end of the operating spectrum.

"This reflects post-crisis governments reaction to both systemic risk and political realities. It comes at a time of increasing structural inconsistencies in advanced economies, including the conflict between the de-risking banks and expecting them to lend more to the struggling real economy.

"After a liquidity and stimulus driven rally, stocks are starting to reflect the realities of structural imbalances in both the economy and the policy responses."

The Dow Jones fell 212 points, its fourth consecutive day of triple-digit moves. The volatility saw the Vix index, known as Wall Street's fear gauge, jump 13 per cent to move back above 21.0.

Investors rushed into the perceived haven of government bonds. The yield on 10-year US benchmark Treasuries reversed an early rise to drop 4 basis points to 3.61 per cent, with a worse than expected US weekly initial claims number and a disappointingly soft Philly Fed business survey providing further support.

The dollar initially lurched higher to fresh 15-month peaks as the President's plans were revealed. However, it swiftly fell back into losses as traders baulked at the belligerent tone of Mr Obama's remarks and the impact his proposals may have on US financial sector competitiveness. The buck was later flat at $1.4101 versus the euro and fell 0.8 per cent to Y90.52 against the yen.

Commodities fell back when the dollar rose, but retained most of those declines even as the buck later lost ground. This put further pressure on resources stocks, already weak on concerns that China would take measures to cool its booming economy following faster than expected growth at the end of last year.

Gold fell 1.1 per cent to $1,099. Oil dropped 1.4 per cent to $76.65. The RJ/CRB index, a benchmark commodities basket, lost 0.5 per cent.

Wall Street's slide infected European bourses. Banks on the continent and in London, many of which have US operations, tumbled in sympathy with their transatlantic peers, pushing both the FTSE Eurofirst 300 and the FTSE 100 down by 1.6 per cent.

‚óŹ Trading in Asia had been mixed, after investors appeared to have come to terms, for the time being, with the need for the Chinese authorities to slow economic activity a touch by applying the brakes. It was better that China was taking action now, rather than later and harder, which could derail the global economy's main engine of growth, was the prevailing view.

"Markets have been spooked by the prospect of tighter Chinese policy, but we think that early, gradual moves should help China stay on a sustainable growth path," said RBC Capital Markets.

The FTSE Asia-Pacific index fell 0.4 per cent, reflecting a 2 per cent slump by the Hang Seng in Hong Kong, as investors in the territory continued to sell bank and property stocks with China exposure. Shanghai was up 0.2 per cent, however. TheNikkei in Tokyo rebounded 1.2 per cent as the yen weakened and tech stocks rallied.

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Erik Johnson, CCIM
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