Investors Shocked By German Naked Short Selling Ban

By: PaddyPowerTrader

U.S. financial stocks fell sharply towards the end of Tuesday’s trading session, dragging the market to another 100 point plus decline. The reasons? Investors were shocked & unnerved by Germany’s plans to ban naked short-selling which served to reinforce rather than dispel worries over the sovereign debt crisis. Also growing uncertainty facing banking in the face of increased scrutiny & regulatory control.

The Standard & Poor’s 500 index slipped 1.4% with its financial index leading the declines. Among the decliners were the biggest names in U.S. banking, with Wells Fargo dropping 4.3%, and Citigroup falling 3.4%. Bank of America shed 2.5%, while J.P. Morgan Chase fell 2.1% . Investment banking leader Goldman Sachs fell 3.7% the lowest it has traded since last July. Visa, MasterCard and Discover Financial Services ended the day 3-4% lower on concern curbs on the card industry may hurt revenue (see below)

Germanized and Baffled by BaFin – The German Ban On Short Selling

Hammering in another nail to the coffin of the European free market BaFin, the German financial regulator, unexpectedly announced yesterday (post market close) a ban on naked short selling and naked credit default swaps of Euro area government bonds and the stocks of 10 German banks and insurers. The ban will apply until the end of March 2011. This was a unilateral move by Germany and echoes earlier comments by German chancellor Angela Merkel two weeks ago to the extent that “in some ways, it’s a battle of the politicians against the markets”.

Going solo in a globalized world might look plain silly. No matter how big the German economy is, implementing any financial markets measure without the consent and cooperation of the US and UK regulators, where the major financial centres lie, seems rather impracticable.

More fundamentally, this looks a lot like killing the messenger. In the short run it’s making things worse – just when the markets appeared to be stabilizing and the EUR was finding a floor, this whacked it down to four year lows against the USD below 1.22.

Firstly this type of emergency measure is usually taken under red code alert. Some are now wondering if things in Europe might really be worse than they look, or if there is a large German financial institution somewhere in serious trouble?

Secondly, by eliminating ways to express trading views on European assets, it sort of zeroes in on the currency as the main view to get a negative exposure to Europe, leading to a sort of “condensed selling” of the EUR. Which really is not good, as the fall in the EUR was the signal that started destabilizing markets to begin with.

Finally there is talk of Germany introducing a Tobin tax on banks & hiking VAT. So much for the tax cutting pledges of Angela Merkel!

Buckle up, we might have a rough trading session ahead of us as actions such as this always have unintended consequences

PS. Merkel has also just banned scoring against Germany in the world cup

UPDATE: France has announced that it won’t follow the ban. Nice to see everybody signing from the same hymn sheet! This may add fuel to the conspiracy theory that the real reason for the ban was to protect some German financial institution?

Financials Under The Cosh

•European banking names are also in retreat today with French banks Soc Gen & Credit Argricole down 3-4% and Spain’s BBVA 5% lower following on from the weakness seen in New York last night in financials on fears of increased regulatory oversight.
Santander of Spain is boosting its US expansion efforts and has held talks about merging its operations there with M&T Bank, a regional lender that counts Warren Buffett as a top shareholder, reports the FT. The talks had reached an advanced stage but insiders suggested they have now stalled over the issue of who should ultimately control the enlarged US unit.
•Credit-card firms caught off-guard by U.S. Senate passage of curbs on debit fees are facing what one executive sees as a “volcanic” eruption of legislation, including possible limits on interest rates. States could enforce their own rate limits on cards, regardless of where the issuer is based, under one proposal. Card companies including Visa and MasterCard already are reeling from the Senate’s surprise passage last week of limits on the fees charged to merchants for each transaction.
Financial broker ICAP is 3.5% lower after reporting a 5% drop in profits.
•While Goldman Sachs Group racked up trading profits for itself every day last quarter, clients who followed the firm’s investment advice fared far worse. Seven of the investment bank’s nine “recommended top trades for 2010” have been money losers for investors who followed the firm’s advice, according to data compiled by Bloomberg from a Goldman Sachs research note sent yesterday.
•Mind you, after yesterday’s successful Irish Sovereign bond issue, 3 times oversubscribed to raise €1.5 billion, the Irish investment story appears to be moving back on track. Bank of Ireland holds its Extraordinary General Court today, to get final approval from shareholders for its rights issue and will move ex rights tonight. With just €800 million left to raise, the remaining deal is very much de-risked. One key Irish bank in a fully capitalised position by mid summer will be a significant positive for perceptions of Ireland Inc. With the Irish sovereign successfully attracting funding yesterday, the door for the Irish banking sector funding re-opens. One key funding in the un-guaranteed space by an Irish bank and we reach another milestone. The long march back from the crisis continues.

Other Company / Equity News

•Stocks on the move today include BMW which is sharply lower after BoA Merrill Lynch cut its recommendation on the luxury carmaker from “neutral” to “underperform”, reasoning that eurozone austerity measures will crimp demand. BoA/ Merrill Lynch also downgraded auto parts manufacturer GN to “underperform”. The stock is off 8% today
•Home Retail Group suffered a similar slump of 4% plus after UBS cut the stock to “neutral” from a “buy” citing increasing earnings risk.
•Telecom Italia is down 3% following news of a regulatory probe into the company for overbidding for fixed line & internet services.
•Basic resource stocks & miners are soft in Europe today as base metal prices fell on speculation that the debt crisis will worsen & result in a drop in demand. Expect the likes of Alcoa, Barrick Gold & Freeport-McMoran to be under pressure in the US session.
•French hotels group Accor plans to reduce the property holdings it holds outright by selling 450 hotels between 2010 and 2013.
•Hewlett-Packard reported second-quarter profit and sales that beat analysts’ estimates after corporate buyers replaced aging server computers and consumers took home new PCs. Profit, excluding some costs, was $1.09 a share, Hewlett- Packard said today in a statement. That compared with the $1.06 average of estimates compiled by Bloomberg.
•BHP Billiton Chief Executive Officer Marius Kloppers won’t rule out a cut in the company’s dividend because of the Australian government’s plan to impose a resource profits tax, the Australian Financial Review reported, citing an interview.
•Global sales of mobile handsets surged 17% in the first quarter, driven by consumers’ increasing shift to smartphones, according to IT research firm Gartner.
Don’t forget, FOMC meeting minutes are due this evening – 19:00 BST.

And Finally… The Greek Debt Crisis Explained in Four Minutes

By The Mole
PaddyPowerTrader.com

The Mole is a man in the know. I don’t trade for a living, but instead work for a well-known Irish institution, heading a desk that regularly trades over €100 million a day. I aim to provide top quality, up-to-date and relevant market news and data, so that traders can make more informed decisions”.© 2010 Copyright PaddyPowerTrader - All Rights Reserved

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