Euro, Stocks, Copper Tumble as Germany Bans Naked Short Sales

Wednesday, May 19, 2010
By Paul Martin

By Patrick Chu

May 19 (Bloomberg) — The euro slid to a four-year low against the dollar, and stocks and copper tumbled after Germany banned certain bearish investments, fueling speculation the European debt crisis will worsen.

The euro fell below $1.22 for the first time since April 17, 2006, trading at $1.2159 at 10:05 a.m. in Tokyo. The MSCI Asia Pacific Index lost 0.9 percent to 115.33. Standard & Poor’s 500 Index futures decreased 0.9 percent following a 1.4 percent plunge in the U.S. benchmark at yesterday’s close in New York. Treasuries surged, sending the 10-year note’s yield down 11 basis points to 3.37 percent. Copper for three-month delivery declined 2.7 percent.

The euro and stocks extended losses as Germany’s BaFin financial-services regulator temporarily banned naked short selling and naked credit-default swaps of euro-area government bonds starting today. The ban also applies to naked short selling in shares of 10 banks and insurers that will last until March 31, 2011, BaFin said yesterday in an e-mailed statement.

“It makes it look as if the Germans are worried about something behind the scenes that the market’s not aware of,” said Michael O’Rourke, chief market strategist at BTIG LLC in Yardley, Pennsylvania, which serves institutional investors. “It almost looked panicked, which further undermines confidence in the markets. They’ve done as poor a job as one can do in delivering a message.”

Asian Stocks

Nippon Sheet Glass Co., which gets 42 percent of its revenue from Europe, tumbled 6.4 percent in Tokyo as a stronger yen dimmed the earnings prospects for Japan’s exporters. LG Display Co., a liquid-crystal display maker that gets about 20 percent of sales from Europe, lost 4.5 percent in Seoul.

The MSCI Asia Pacific Index has declined 11 percent from its high for the year on April 15 as Europe’s debt crisis and concern China will quell inflation eroded confidence in a global economic recovery. A decline of 10 percent is the level some analysts refer to as a correction.

Short selling involves the sale of borrowed securities in the hope of profiting by buying them later at a lower price and returning them to the owner. When securities are sold naked, the trader fails to borrow the assets before sending an order to sell. BaFin will prohibit trading in credit swaps on euro-area governments that aren’t used to hedge against losses in the event the government defaults, the regulator said.

BaFin said it was taking the step because of “exceptional volatility” in euro-area bonds. “Massive” short-selling was leading to excessive price movements which “could endanger the stability of the entire financial system.”

‘Severe Consequence’

“This is a mistake of a serious fundamental nature and of severe consequence,” Mark Grant, managing director of Southwest Securities Inc., in Fort Lauderdale, Florida, said in a note to institutional clients. Germany is making “an obvious attempt to control financial markets across the globe by this action just as they plead for investors to provide funding,” he said.

Goldman Sachs Group Inc., Bank of America Corp. and JPMorgan Chase & Co. lost at least 2 percent to pace declines in 78 of 79 financial shares in the S&P 500.

The MSCI World Index of stocks in 23 developed nations slipped 0.7 percent, erasing a 1.3 percent rally. European financial markets closed before BaFin confirmed the ban. The Stoxx Europe 600 Index ended the session up 1.3 percent.

Copper futures for July delivery lost $190 to $6,505 a metric ton on the London Metal Exchange.

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