Daily Insight: Regulatory Regime, Housing Starts and Give Me Yield Baby!

U.S. stocks began the session higher on Tuesday, but prices deteriorated as we headed into the afternoon session. Chances of recovery within the eurozone are falling, which caused traders to run for a little more cover. German Chancellor Merkel sated that she would support a tax on the financial sector to help fund the costs of the sovereign-debt rescue plan.

Combining with this ongoing worry was a surprise ban on naked short-selling and credit-default swaps by German regulators. I’m certainly not going to defend naked positions, but this sudden unilateral decision had on affect on U.S. trading as people believed it would shake up European markets when they opened last night – and indeed they were shaken, down 2.5%-3.0% across the board. Politicians can maintain their attempt to control the markets from responding to terrible policy decisions, but if they take away just one in a number of ways to short policy then traders will just shift their assault to the currency – and the euro surely doesn’t need additional attack.

Further complicating things was an amendment out of the U.S. Senate that would allow states to enforce their own credit-card rate limits regardless of where the issuer is located. Banks currently get around various state usury laws by domiciling in states with the least regulations – imagine that. Differing state laws is about as messy as legislation can get, leading to confusion within the industry. This is on top of the debit-card “swipe” fees – the fees charged to merchants on each transaction, which continues to whack shares of Visa and MasterCard. Financial regulation is really starting roll.

To no surprise, financial shares led the market lower. Consumer discretionary shares also got hit hard, along with tech. Consumer staples and telecoms were the relative winners for a third session. All 10 major groups did decline during the session.

In other regulatory news, U.S. stock exchanges and regulators proposed a six-month pilot program to help guard against events like the “flash crash” that occurred on May 6. Circuit breakers will be put in place on individual stocks (trading paused if a stock price moves 10% or more in a five-minute period). Broader circuit breakers will be rolled out at a later date that will force a pause in market-wide trading. These new circuit breakers are aimed at electronic exchanges. The New York Stock Exchange has had circuit breakers in place for many years, as laid out below the jump.

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Brent Vondera, Senior Analyst
www.acrinv.com