The impact of the Panama Papers on global markets

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The leak of 11.5 million documents relating to offshore accounts could point to more bank scrutiny.

I was asked several times over the weekend what the implications of the Panama Papers were for global markets. The short answer is I don't know, but there are several implications for the markets that need to be considered.

1) More bank regulatory scrutiny? To the extent that banks were facilitators of these offshore accounts, it would add impetus to more regulatory scrutiny.

2) More scrutiny by U.S. prosecutors of foreign banks? It looks like several subsidiaries of European banks were among the more active creators of these offshore accounts. U.S. prosecutors have already initiated fines and sanctions against foreign banks for violations of U.S. laws. This may provide additional information for even more scrutiny.

3) More regulation/taxation in general? This will provide even more ammunition to those on the more hawkish side of regulatory and tax issues — Sen. Elizabeth Warren of Massachusetts is a good example — who will use this to argue for even more bank regulations and higher taxation of the wealthy.

By the way, while much of the focus appears to be on political figures hiding (potentially) ill-gotten gains, it appears that one of the most common uses of these accounts is for a much more mundane purpose: to hide assets due to a divorce settlement.

In the meantime, the broader question is what direction the markets will move during the second quarter. The two negatives for the market are well-known.

1) Most momentum indicators (relative strength, for example) show the markets are slightly overbought.

2) The earnings outlook contains more downside than upside risk. At $120 for earnings in the S&P 500 , we are trading at roughly 17.3 times earnings, that is not expensive but not cheap either. The problem is, most do not believe there is a lot of upside to that $120 figure, but many believe there is significant downside.

I said last week that the market seems to be a solid "hold" right now, but a surprising number of traders think the pain trade (the direction that would cause the most pain or surprise to the market) is up. They cite several reasons.

1) The Federal Reserve has put a floor under market. The Fed was a major cause of market volatility in the first quarter. Yellen's more dovish stand — if it holds — will keep volatility lower.

2) Assuming the Fed is maintaining its dovish stance, the dollar is likely peaking, another source of volatility.

3) The other major sources of volatility — oil and China — are also more stable.

4) Many active traders dramatically underperformed the markets in the first quarter. "I was too short for too long" was a common refrain. A small rise in the market — certainly a move toward the old historic high of 2,130 on the S&P — will force even more back in.

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