Volcker Rule Sinks Stocks

Stocks fell as investors reacted negatively to the adoption of the “Volcker rule”, which prohibits banks from proprietary trading.
 
The major stock indices took hard falls on Wednesday, as investors pondered the future of a stock market without proprietary trading by banks. Most stocks were in the red on Wednesday, after the Federal Reserve and four financial regulatory agencies adopted the so-called “Volcker rule”, named after former Fed Chair, Paul Volcker.
 
Although Volcker was not personally involved in writing the 71-page document, it resulted from Volcker’s insistence that the 2010 Dodd-Frank Act should include prohibitions on proprietary trading by banks, to prevent those institutions from taking on excessive risks and causing another financial crisis.
 
The final version of the Volcker rule actually provides loopholes for the banks to engage in hedging and market-making trades. As a result, we can expect the megabanks to be employing plenty of lawyers to justify their prop trades as “market making” and “hedging”, once the rule takes effect in July of 2015.
 
From the investors’ perspective, the rule is bad news because the proprietary trading activities of the so-called “primary dealers” – the 21 financial institutions which are permitted to conduct transactions with the Federal Reserve – bring the flow of freshly-printed money from the quantitative easing program to the stock exchanges. With no prop trading allowed, the Fed could be purchasing $170 billion in Treasury securities and mortgage-backed securities every month (instead of the current $85 billion) and the money would still have no means of finding its way to the stock market to inflate prices.
 
Although the new rule does not take effect until July of 2015, any future quantitative easing program instituted after that point will have a drastically limited impact on the stock market.

The Dow Jones Industrial Average (DIA) lost 129 points to finish Wednesday’s trading session at 15,843 for a 0.81 percent decline. The S&P 500 (SPY) fell 1.13 percent to close at 1,782.
 
The Nasdaq 100 (QQQ) dropped 1.29 percent to finish at 3,468. The Russell 2000 (IWM) sank 1.62 percent to end the day at 1,101.
 
In other major markets, oil (USO) fell 0.93 percent to close at $34.98.
 
On London’s ICE Futures Europe Exchange, January futures for Brent crude oil advanced 29 cents (0.27 percent) to $109.42/bbl. (BNO).
 
February gold futures declined $9.40 (0.75 percent) to $1,251.70 per ounce (GLD).
 
Transports slid off the road on Wednesday, as the Dow Jones Transportation Average (IYT) fell 1.61 percent.
 
In Japan, stocks declined as the yen gained strength. A stronger yen causes Japanese exports to be less competitively priced in foreign markets. The yen climbed to 102.59 per dollar during Wednesday’s trading session in Tokyo. (FXY). As short-sellers of the currency were being squeezed, a “double-bottom” appeared on most of the yen forex charts, signaling an imminent rise and attracting buyers. Mazda shares sank 1.04 percent on the Tokyo Stock Exchange. The Nikkei 225 Stock Average declined 0.62 percent to 15,515 (EWJ).
 
Stocks took a hard fall in China on widespread concern that the nation will lower its 2014 economic growth target from 7.5 percent to 7.0 percent. Coal mining stocks were particularly hard-hit after the National Development and Reform Commission announced that the nation will institute regional coal consumption control plans to address the nation’s smog problem. The Shanghai Composite Index sank 1.49 percent to 2,204 (FXI). Hong Kong’s Hang Seng Index fell 1.71 percent to end the day at 23,338 (EWH).

In Europe, stocks declined moderately after the Hellenic Statistical Authority reported that the unemployment rate in Greece reached a new record high in September, climbing to 27.4 percent from August’s 27.3 percent. The news reinforced Tuesday’s grim message from Christine Lagarde, Managing Director of the International Monetary Fund (IMF), who insisted that it was premature to declare the Eurozone economic crisis over with 12 percent of the workforce unemployed. Lagarde called upon the European Central Bank to enact reforms in order to restore “the flow of credit on reasonable terms to businesses and households”.
 
The Euro STOXX 50 Index finished Wednesday’s session with a 0.46 percent drop to 2,947 – falling further below its 50-day moving average of 3,019. Its Relative Strength Index is 36.05 (FEZ).
 
Technical indicators revealed that the S&P 500 remained above its 50-day moving average of 1,758, despite sinking 1.13 percent to finish Wednesday’s session at 1,782. Its Relative Strength Index dropped from 59.25 to 48.80. The MACD is on a downward trajectory, which would suggest that the S&P could continue to decline during the immediate future.
 
On Wednesday, nearly all sectors made significant declines, except for the consumer staples sector, which managed to advance 0.16 percent.
 
Consumer Discretionary (XLY):  -0.92%
 
Technology:  (XLK):  -0.92%
 
Industrials (XLI):  -1.57%
 
Materials: (XLB):  -1.70%
 
Energy (XLE):  -1.41%
 
Financials: (XLF):  -1.36%
 
Utilities (XLU):  -0.82%
 
Health Care: (XLV):  -1.72%
 
Consumer Staples (XLP):  +0.16%
 
Bottom line:  On Wednesday, investors reacted negatively to the adoption of the “Volcker rule”, which will make any quantitative easing program after July of 2015 almost completely irrelevant to stock prices.
 
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