Dread of potential new financial regulations and late-week risk-trimming raised the anxiety among U.S. traders on Friday, said Wall Street traders and analysts.
A bill that could revamp how financial firms operate was approved by the Senate last night, paving the way for potentially deep curbs in the profitability of U.S. banks such as J.P. Morgan and Goldman Sachs.
Fears of how companies would perform in the new regulatory regime, as well as widespread concerns about the credit crisis in Europe, are likely to affect stocks today, say traders.
Because volatility has been high this week, many market participants have slashed positions, say traders, either closing out trades entirely or trimming them substantially. Those cutbacks contributed to the market correction yesterday, when the Dow dropped nearly 400 points.
As of midday, the Dow was relatively flat, while financials like J.P. Morgan, Goldman, and Morgan Stanley were up. Shares of CME Group and IntercontinentalExchange , electronic exchanges that could benefit from the regulatory reforms if derivatives trading gravitates toward new platforms, were also up.
Uncertainty overseas is adding to the anxiety. Many U.S. players who are bearish on the performance of the euro, which has stumbled amid revelations of deep debt in Southern European countries like Greece, Spain, and Portugal, have nonetheless taken losses since Tuesday, when the euro launched a surprise rally against the dollar.
Even though most U.S. financial firms and hedge funds contend that the euro has much further to fall, some have been forced to “cover,” or close out, their euro shorts this week to avoid sustaining further losses from the currency’s rise.
The many announcements from governments and central banks each day has made some market participants wary, said one trader, of holding on to currency positions over the weekend. Weekends and nights, which in the past had been relatively slow periods in the U.S., are now dominated by major events—like the passage of the Senate bill in Washington shortly before 9pm ET last night. The result is that currency trades are being closed out each evening and on Friday nights, this trader said.
Concern amid financial firms centers largely on Section 716 of the Senate bill, which stipulates that the parts of banks that trade swaps—complex instruments tied to underlying securities like mortgage bonds—will not receive government assistance in a time of crisis.
“Notwithstanding any other provision of law (including regulations), no Federal assistance may be provided to any swaps entity with respect to any swap, security-based swap, or other activity of the swaps entity,” states the bill.