MARKET COMMENT: European Stocks Fall After German Short-sale Ban - WSJ.com

By Sarah Turner Wall Street Journal May 19, 2010

LONDON (Dow Jones)--European shares fell Wednesday, as a solo effort from Germany to crack down on some types of short-selling highlighted disparity in policy-making though the region and ratcheted up fears for the future of the union.

The Stoxx Europe 600 index fell 3% to 243.82, the third session of losses in four, with banks and miners down sharply.

In the broadest terms, the ban on short-selling will curtail risk appetite for investors as hedging activities --on which some investors have relied on in the past--will no longer be possible, said Gerhard Schwarz, head of global equity strategy at UniCredit.

"Higher risk premiums will be demanded which means lower prices," he added.

The Stoxx Europe 600 index is now trading back at an intra-day level not seen since hours after a EUR750 billion aid package was introduced in order to help vulnerable European economies such as Greece stave off default.

Shares in Europe had made some progress after the aid package but the move by Germany's Federal Financial Supervisory Authority, or BaFin, late Tuesday to prohibit several trading practices, including "naked" short-selling of some assets, sent investors reeling on Wednesday.

Of the major benchmarks, the French CAC-40 index fell 2.9% to 3,511.67, the German DAX index lost 2.7% to 5,988.67 and the U.K. FTSE 100 index declined 2.8% to 5,158.08.

Around the globe, Asian shares ended lower, while U.S. stocks declined in early trading.

There are specific implications from the ban for Europe as Germany's effort to try and tackle speculators "isn't an integrated measure," said Schwarz at UniCredit.

"There's a credibility risk to the euro-zone project and that won't be solved by putting money on the table or by trying to punish speculators," he said.

"They have to show unity, they have to build trust and come up with comprehensive measures and clear messages," he added.

That markets are skeptical about the future of the euro zone has notably shown up in the currency markets, and the euro fell to a fresh four-year low against the dollar in Asian trading.

The common currency gained 1.1% to $1.2321 in the afternoon.

The European Commission called for coordinating regulatory actions across the union.

Still, Citigroup strategists said that Germany's short-selling ban represents further downside risks for the euro.

"Disallowing market participants to express a bearish view on Europe through short positions in fixed income and equity markets will force such trades into euro sales, exacerbating the downside," they said.

The timing and the suddenness of the move by Germany also led some strategists to question whether it is to cushion markets against a crisis.

"We thought that things were O.K. but then we get these measures which we normally get in a crisis," said Daan Potjer, managing partner at Aethra Asset Management in the Netherlands.

"You can't now outright trade against banks and against the quality of government and other paper [in Germany]."

That didn't help financials as a sector on Wednesday. In France, Societe Generale shares fell 4.2% and Credit Agricole shares lost 3.6%. Spanish lender BBVA, down 3.7%, was also downgraded to neutral from overweight at J.P. Morgan, which said the shadow of Spain's economic troubles has become too large.

Of the stocks where Germany has banned naked short sales, Deutsche Bank shares fell 2.9% and insurance group Allianz shares lost 3.3%.

Those that had naked short sales on these companies would have to buy the stocks to close their trades.

After the euro's early drop against the dollar, commodity futures were weak, with copper futures down 1.7% and platinum futures down 4.4%. That weighed on the mining sector, with coal and copper giant Xstrata down 7.5% and Antofagasta shares down 6.2%.

There were barely any advancers.

PV Crystalox Solar shares climbed 11.2% as the company said an impending cut in the feed-in tariff in Germany has spurred demand, which helped both shipments and wafer prices.

Though the cut is expected to impact shipments and prices in the second half, current indications are that demand and pricing in the third quarter remain firm.



-By Sarah Turner; 415-439-6400; AskNewswires@dowjones.com

MARKET COMMENT: European Stocks Fall After German Short-sale Ban - WSJ.com