(New York)

In what could be a big gain for banks, US regulators are poised to roll back parts of the dreaded Volcker rule, or the Dodd-Frank regulation that virtually ended proprietary trading on Wall Street. One of the big points of loosening is that it will no longer be assumed that if a position is held for less than 60 days that it is a violation of the rule. Banks will also be able to demonstrate that they are market-making rather than proprietary trading much more simply.

FINSUM: Banks have long complained that the Volcker Rule meant they could not provide as much fixed income liquidity to markets as they once did. That should change now, theoretically.

(New York)

If you are not worried about markets and the global economy at the moment you should be. At least according to legend George Soros. The hedge fund manager thinks that the world is headed for “another major financial crisis”, this time spear-headed by politics. Soros believes the epicenter of the crisis will be the EU. “The EU is in an existential crisis. Everything that could go wrong has gone wrong”, said Soros, continuing that “it needs to reinvent itself”. Soros believes the problems in Europe have three facets: “the refugee crisis, territorial disintegration exemplified by Brexit and an austerity policy, prompted by the financial crisis”.

FINSUM: We sort of feel like we are in a time warp that loops back to the summers of 2011 and 2012. We do not believe the whole EU project, and the Euro will fall apart now.

(New York)

US investors got a rude shock yesterday: the Dow fell a whopping 391 points. The reason? An election in Italy that occurred several weeks ago led to the president there announcing someone else as prime minister, leading to a political crisis that could see alternative parties come to power. The big question now is whether this is the kind of situation that will blow over in a few days, or whether it is the kind of protracted issue that can ruin a whole summer, such as in 2011 and 2012.

FINSUM: We are worried this could take longer to play out than US investors would like. The big worry here is that Italy might default and then leave the Euro, which could lead to an unwinding of the whole currency. The size of those implications coupled with the complexity of the situation in Italy means this could take some time to play out.

(Rome)

For those who consider themselves students of the market, yesterday was a real whopper. Short-term bond yields can usually be seen as a proxy for cash. But in a truly astonishing move, Italian two-year yields rose an amazing 1.5 percentage points yesterday (150 bp) to 2.4%. By comparison, other southern European yields, such as Spain, moved just 12 bp. Markets are worried about a massive Italian default, and possibly the redenomination of bonds into Lira.

FINSUM: When you get right down to it the panic here is not just about a default, but about a breakup of the Euro. We have always said it would be Italy to leave first, and the major question is whether others would join them when that happened.

(New York)

Investors who own bank stocks or ETFs have probably been shocked over the last couple of days. The financial sector lost 4% yesterday alone. Many may be wondering why. While no one is quite sure, there do seem to be some concrete reasons, and not just because of the Italian drama. The bigger culprit is likely because of tumbling US Treasury yields, which have fallen from well above 3%, to well below 2.9%. Banks stocks have historically performed poorly in periods of flattening yield curves. Lower rates and yields hurt banks’ net interest margin.

FINSUM: US banks have very little exposure to Italy, so there is no reason for any meltdown fears, yet the sector has reacted almost overly strongly. It seems the only explanation has to do with US yields falling.