German short-selling ban knocks FTSE

 

Top shares suffered steep falls by midday on Wednesday, after Germany's move to limit short-selling reignited uncertainty among investors, with risk sensitive commodity-linked stocks and banks hardest hit.

By 11:31 a.m. the FTSE 100 was down 127.10 points, or 2.4 percent, at 5,180.24, having added 0.9 percent on Tuesday.

The ban on naked short sales of euro-denominated government bonds, credit default swaps based on those bonds, and shares in Germany's 10 leading financial institutions was announced after European markets closed on Tuesday.

Germany's decision left investors questioning what further measures might be taken, and did nothing to allay fears emanating from Europe's debt crisis.

"The move by Germany is being seen as an attack on market speculators, which it blames for much of the uncertainty and subsequent weakness in equities and the euro" Joshua Raymond, market strategist at City Index said.

"The problem is, however, that this move does not fix the reasons as to why investors have been bearish about the euro zone in the first place."

Commodity-linked equities dropped as investors took money off the table from risk sensitive sectors. Miners Rio Tinto, Xstrata, Lonmin, Kazakhmys and BHP Billiton fell 5.3 to 7 percent.

Energy stocks were lower as crude fell below $69 per barrel, with BG Group, BG Group and Royal Dutch Shell down 0.7-1.9 percent.

"With sensitivities already very high and investors not really knowing the true implications of this move just yet, they have removed large chunks of money out of the riskier stocks," Raymond added.

The FTSE, whose weighting is dominated by miners and banks, is down 4.4 percent on the year and 11 percent off its 2010 high hit in mid-April, weighed by euro zone uncertainty.

Meanwhile, the VDAX-NEW volatility index, a gauge of investor risk appetite or aversion, jumped 18 percent after the announcement. The higher the volatility the lower investors' appetite for risk is.

U.S. futures for the Dow Jones, the S&P 500 and the Nasdaq were indicating a weaker start on Wednesday, adding to the previous sessions losses, as worries over tighter financial regulation put pressure on equities.

BANKING NIGHTMARE

Risk sensitive banks were also lower. Barclays, HSBC, Royal Bank of Scotland and Lloyds Banking Group fell 1.1-5.4 percent.

ICAP, the world's biggest interdealer broker, fell 4.3 percent, paring Tuesday's gains as it reported a good start to its financial year, but with investors wary of what impact any further trading regulations may have on business.

British credit information firm Experian outperformed the wider UK market, falling 1.3 percent after upping its dividend and topping forecasts with its results.

Home Retail, which lost its dividend attraction on Wednesday, dropped 7.5 percent. Its shares were also weighed down by UBS which downgraded its rating and cut its forecasts on the owner of Argos and Homebase, citing potential threats to earnings and the spectre of M&A waning.

There were no stocks in positive territory by midday but defensive issues were outperforming the sell-off, with AstraZeneca and GlaxoSmithKline down 0.8 and 1.0 percent respectively.