By Paul Quintaro
On Thursday last week, several countries in the European Union (EU) announced that they were extending the ban on the short sales of financial stocks. Belgium, Italy, France and Spain had imposed bans earlier in the month.
European markets came under heavy selling pressure late in July. Although many cited the debt ceiling extension as the chief catalyst for the sell-off in the U.S. around that time, a more plausible explanation may have been investors’ fears of a European financial contagion.
In response to the movements in the European markets, a short sale ban was proposed in a meeting among eurozone officials on August 11. However, the officials failed to reach an agreement that would have banned short selling in all european markets.
Instead, several eurozone members opted to impose their own short sale ban on financial stocks. France, Belgium, Italy and Spain opted to enact bans. These bans went into effect on August 12 and were set to expire within 15 days (except Belgium’s, which was imposed indefinitely).
Yet, on Thursday, the countries opted to extend the ban, promising to reconsider at the end of September. Many cited continued market volatility as the chief reason for their extension.
Banning short selling may work as a way to temporarily halt the decline in stocks. Short selling may drive down prices by increasing the amount of stocks that are actively sold at a given time. Short sellers sell stocks that their owners may have otherwise held.
Further, if the price of a stock begins to fall far enough, it may encourage non-short sellers to dump their shares, further driving down the price.
Yet, short selling is an old practice that may be key for the efficient movement of markets. Thus, although stopping the practice of short selling may be beneficial to the market in the short-term, in the long run it may jeopardize the broader trust of market participants.
Further, banning short sales may be viewed as a bias on the part of market regulators. In order for markets to operate effectively, it may be necessary for them to be able to trade freely down as well as up.
On Thursday, the German DAX slumped, declining over two percent.
Some had proposed that the decline might have been due to market rumors. Chatter had circulated among traders that a ratings agency downgrade of Germany was imminent. Yet, later in the day, all three major ratings agencies reported that they had no plans for a downgrade of Germany.
That had little effect on the German market, which failed to rally.
Traders wishing to short may be taking out their desires on the German market. Germany currently bans naked short selling, but has no bans on regular short sales.
The fact that Germany is fundamentally linked to the other troubled eurozone members may be putting additional pressure on its market from these traders who desire to sell short.
If Germany continues to sell-off, it may put pressure on relations between members of the eurozone. That could further weaken the euro, which has already declined notably. Of course, should Europe manage to solve its financial problems, the euro could snap back.
Important Note
Content, including research, tools and securities symbols, is for educational and informational purposes and should not be intended as a recommendation or solicitation to engage in any particular securities transaction or investment strategy. You alone are responsible for evaluating which securities and strategies better suit your financial situation and goals, risk profile, etc. The projections regarding the probability of investment outcomes are hypothetical and not guaranteed for accuracy or completeness. They do not reflect actual investment outcomes and are not guarantees of future results, and do not take into consideration commissions, margin interest and other costs that will impact investment outcomes. Content may be out of date or time-sensitive, and is subject to change or removal without notice. Supporting documentation for any claims made in this post will be supplied upon your email request to editor@zecco.com.
At the time of distribution of the material contained herein, neither Zecco Trading nor Zecco Forex was a market maker or acted as the contra-party for customer transactions through the firm’s principal accounts for the securities discussed.
Zecco Holdings, Zecco Trading, Zecco Forex, and their officers/partners/employees may hold a nominal financial interest in any of the securities discussed herein, with the nature of the interest consisting of, but not limited to, any option, right, warrant, future, long, or short position.
Neither Zecco Trading nor Zecco Forex has participated as a manager or co-manager in public offerings of the securities mentioned herein within the last twelve months.
No comments:
Post a Comment