MarketView for January 22

Summary 

Stocks chalked up their worst three-day decline in 10 months on Friday, over fears that the White House's plan to curb bank risk-taking would reduce profit levels. At the same time, tech shares were down as a result of Google's disappointing results. Meanwhile, uncertainty over the Senate's confirmation of Ben Bernanke for another term as the Federal Reserve's chairman also rattled investors in a week when political squabbles helped erase stocks' gains for 2010.

Since the Democrats lost their 60-vote hold in the Senate with the election of a Republican in Massachusetts on Tuesday, there is a growing sense among investors that political uncertainty has all but ended the rally that began in March. Financials and technology shares endured the brunt of the selling, with JPMorgan down 3.4 percent, to close at $39.16, Goldman Sachs fell 4.2 percent to close at $154.12, while Google closed down 5.7 percent at $550.01, a day after the Web search company posted quarterly revenue that missed some forecasts.

President Barack Obama unveiled his bank proposals on Thursday, saying banks should no longer be allowed to own, sponsor or invest in hedge funds for proprietary profit. Proprietary trading -- when a firm uses its own money to make bets on markets -- has been a profit engine for some major banks. The proposals must receive congressional approval.

For the week, the Dow dropped 4.1 percent, the S&P 500 lost 3.9 percent and the Nasdaq tumbled 3.6 percent. It was the worst week for the S&P 500 and Nasdaq since October and the worst week for the Dow since March. Stocks hit session lows late in the day on news that Britain had raised its international terrorism threat level.

The S&P 500 registered its worst 3-day slide since March 2009, around the start of the recent rally that sent both the S&P 500 and the Dow to 15-month highs as recently as Tuesday. The Dow and the S&P 500 are now off more than 2 percent year-to-date, while the Nasdaq has shed almost 3 percent.

The selling of the past three days left the market's technical picture looking bleak after major indexes sunk below key support levels and their 50-day moving averages, a move considered a bearish signal.

In another sign of how raw the nerves are on Wall Street, the CBOE Volatility index, a measure of Wall Street's sentiment, registered its biggest 3-day rise in nearly 3 years, increasing 55.4 percent.

Aside from worry about what effect the Obama proposals will have on banks, the Street was also concerned over China's efforts to prevent the world's third-largest economy from overheating. Since China has led the nascent global economic recovery, any curbs it puts on lending threatens to slow demand that other economies rely on to spur their own growth. Shares of multinationals and commodity-related companies also fell, with Alcoa off 6 percent at $13.40 and Caterpillar down 4.6 percent at $54.25.

Apple was down 5.04 percent at $197.59, making it the biggest drag on the Nasdaq, followed by Google. Other disappointing news on the technology front came from Advanced Micro Devices, which warned that sales in the first quarter of 2010 will be down. Its shares tumbled 12.4 percent to $7.88.

Credit card company Capital One Financial Corp tumbled 12.1 percent to $37.53, a day after warning it faced tightening profit margins on loans it makes.

Capital One and American Express Co reported higher-than-forecast fourth-quarter earnings on Thursday but expressed concern about the growth outlook for credit cards. AmEx shares were the Dow's top drag, falling 8.5 percent to $38.59.

Western Europe Says Not For Us

Major European economies offered support on Friday for U.S. President Barack Obama's plan to limit banks' size and trading activities but indicated they had no interest in following suit. Obama's dramatic proposals could rewrite the world financial order but experts said they were light on detail and could cloud the global approach fostered by the Group of 20 nations.

Obama made his proposals on Thursday, saying he was ready to fight resistance from Wall Street banks he blamed for helping cause the global financial crisis. The plan would prevent banks from investing in, owning or sponsoring a hedge fund or private equity fund.

It would set a new limit on banks' size in relation to the overall financial sector and, perhaps most dramatically, could also bar institutions from proprietary trading operations, which are unrelated to serving customers, for their own profit. Proprietary trading involves firms making bets on markets with their own money and has been the source of much of banks' bumper profits before and after the financial crisis.

Britain's opposition Conservatives, tipped by polls to win an election to be held by June, offered more solid support. "President Obama has created a lot of space for the rest of the world to come up with what I think would be a sensible system of international rules," Conservative finance spokesman George Osborne told BBC Radio.  "I have said consistently that we should look at separating retail banking from activities like large-scale propriety trading and that this was best done internationally."

Doubts remain as to whether Obama's scheme can be enacted unchanged, not least since his party lost a key Senate seat this week, depriving it of a "super majority" in that house.

Banks' return to paying massive bonuses has prompted public and media outrage in the United States and Europe after taxpayer money was used to bail out many of them. Wall Street sold off on Thursday and the threat that other countries will follow Obama's lead rattled European lenders.

Washington will have to gain worldwide support for its measures or risk international banks fleeing its shores. In September, a summit of Group of 20 leaders hosted by Obama called for crackdowns on bankers' bonuses and a build-up in banks' capital.

But while there are still signs of international intent, different centers are increasingly pursuing different paths.

An official involved in the global regulation process said many in Europe were caught on the hop.

"Everybody was coordinating their work through the G20, the Financial Stability Board and the Basel Committee," the official said. "Nobody knows the details or whether other countries may follow. This is creating regulatory confusion."

The German finance ministry stressed the need to move forward internationally and said Berlin would present its own proposals on improving banking regulation.

"We see the new proposals as a helpful suggestion for the continuing discussions on an international level. And we're obviously aiming to find a solution to the problem of the 'too big to fail' issue," ministry spokesman Michael Offer said.

Spain's deputy prime minister Maria Teres Fernandez de la Vega said her country shared Obama's views about the causes of the crisis but that each country should take its own measures.

The European response echoed that to Obama's announcement last week that Wall Street banks should pay a levy of up to $117 billion to reimburse taxpayers for their bailout.

Britain, France and Germany extolled the idea but said they had their own plans and would not follow suit. London and Paris plan a 50 percent tax on bank bonuses.

On the other side of the coin, the International Monetary Fund has been tasked to look at a global tax on financial transactions, proposed by Britain's Gordon Brown late last year and supported by European Union leaders. The U.S. administration is opposed to that.