A less onerous than expected Volcker report fuels market

2010-02-02

Paul Volcker testified on reulations to limit proprietary trading activities at banks before the Senate Banking Committee today at 10AM.  His report was preceded this past Friday by a report on DealBreaker.com saying that the Volcker Rule was not going to pass the Senate, according to lawmakers.  Still, the market has taken a nosedive since the Obama Bank Tax and the Volcker Rule were announced a few weeks ago, so it took was in defensive mode until 10AM.  After Volcker said that the proposal would limit *certain* speculative activities and *international consensus* would be appropriate, analysts' fears that bank earnings would be curtailed by more than 20% seemed clearly overblown.  

In response, banks with speculative operations, e.g., JPMorgan (JPM) and Goldman Sachs (GS) outperformed.  The entire market rallied after the report with the Dow up 111 points (109 bps), the S&P500 14 points higher (130 bps), and the Nasdaq gaining 19 points (87 bps).  

Pending home sales were also up 1% in December after gapping down 16% in November and causing investor concern that home sales will decline and there is higher likelihood of another leg down in home prices.  The marginally positive index reading was well-received, but probably should not be held responsible for the market rally as much as the relatively benign Volcker report.

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