Euro skids and shares tumble on German ban

 

Fears of greater financial regulation across Europe hammered stocks and buoyed core euro zone bonds on Wednesday after German measures aimed at limiting speculation were taken to smack of desperation.

Wall Street, troubled by progress in U.S. financial regulatory reform, looked set to open lower.

Stock markets were unnerved by Germany's unilateral ban on certain naked shorts announced late on Tuesday. And the euro suffered a kneejerk reaction, falling more than 1 percent against the yen, as investors saw foreign exchange as the only way to bet against the euro zone.

World stocks as measured by the MSCI All-Country index were down 1.43 percent whilst the more volatile emerging markets index fell 2.64 percent.

The FTSEurofirst 300 index of top European shares tumbled 2.20 percent, with banks and commodity stocks the hardest hit.

The index, which gained nearly 26 percent in 2009, is now down 4.31 percent for the year amid persistent concerns about the euro zone's debt problems.

There were also fears that the debt crisis was about to worsen as some believed Germany's move smacked of desperation.

"Investors are somewhat spooked" said Stephen Pope, chief global equity strategist at Cantor Fitzgerald. "The worry is whether other markets will try and copy."

Germany banned naked short selling of shares in its 10 most important financial institutions, euro-denominated government bonds and credit default swaps based on those bonds. Naked short selling is when an investor sells shares without borrowing them first or ensuring they can be borrowed.

German Bunds soared and the premium that investors demand to hold 10-year Greek government bonds rather than German benchmark Bunds rose as investors sought safe havens, although some analysts said the market reaction was overdone.

Markets fretted that Germany's moves would be adopted by other European regulators, but France denied it was considering doing so and said it had not been consulted.

"Market participants concluded that the move was ill-thought out, uncoordinated, and likely ineffective" said Mark Chandler, global head of FX strategy at Brown Brothers Harriman. "This would seem to be yet another case of a European government taking the wrong fork in the road."

EURO UNDER PRESSURE

The euro was also put under pressure after German Chancellor Angela Merkel said the currency was in danger in a speech to parliament in which she urged the European Union to speed up financial market supervision.

The struggling currency fell more than 1 percent on the day versus the yen, as the low-yielding Japanese currency rose broadly on risk aversion.

Against the dollar it struggled up from fresh four-year lows hit in early Asian trade to $1.221, but was still down 14.76 percent year to date.

"The reaction in the euro is due to all the uncertainty that this brings - there have been fiscal problems, liquidity problems and now there is regulation on top of that" said Niels Christensen, currency strategist at Nordea in Copenhagen.

Earlier in Japan, the Nikkei stock index closed down 0.5 percent to a near three-month closing low.

Wall Street looked set to open lower after Republican senators reached a compromise with Democrats on the balance of power between state and federal officials over bank oversight, allowing a landmark Wall Street reform bill to move towards final passage.

The U.S. dollar rose to 87.284 against a basket of currencies after touching a 14-month high as investors sought safer havens for their cash.

In fixed income markets, the 10-year Greek/German government bond yield spread widened to 521 basis points from 504 bps at the European settlement close on Tuesday.

Greek, Spanish and Portuguese credit default swaps all tightened as participants closed out short risky positions in thinning liquidity.