Rumours of short-selling ban spark share surge
Watchdog holds meeting with all EU's 27 national regulators
Published 12/08/2011 | 05:00
SHARES in European banks staged a late recovery last night, led by speculation Europe's regulator could ban the short selling of financial stocks.
Short selling refers to trades where investors stand to gain if share prices for a particular company fall. A ban could have big short-term effects by forcing some investors to buy shares to cover bets already in place -- driving up prices. A ban is already in force in Ireland.
The European Union's financial market regulator held a telephone conference with all 27 national regulators yesterday, with many in the markets convinced it was held to discuss short selling of bank shares.
It came after the European Securities and Markets Authority said it was monitoring bank-share volatility closely and was in touch with national regulators.
That was in response to massive volatility in prices, including a fall at one stage on Wednesday that implied France's second-biggest bank had lost a fifth of its value.
Shares in French bank Societe Generale, which had tumbled 15pc on Wednesday, closed up 3.7pc yesterday. Five times the normal number of shares were traded. The bank said it would post "solid" results.
The recovery came on the back of market chatter about the short-selling ban and after the bank's CEO Frederic Oudea dismissed rumours of liquidity problems at the bank as "absolutely rubbish".
European stocks rose, with the Stoxx Europe 600 Index surging the most since May 2010, as investors speculated that recent losses had overestimated the slowdown in the pace of economic growth.
The Stoxx 600 jumped 3.2pc. National benchmark indices rose in every western European market except Denmark and Greece. The UK's FTSE 100 Index increased 3.1pc and Germany's DAX Index soared 3.3pc. France's CAC 40 Index climbed 2.9pc.
Price rises in Europe carried into the US after markets there opened yesterday, boosted by positive jobs data.
"Markets are so oversold and there has been some relief, but I'm not sure it will last," said Mike Lenhoff, chief strategist at Brewin Dolphin Securities.
"Banks have been the most vulnerable and have become the vanguard of the rebound."
However, yesterday's surge was by no means a sure thing and volatility was still the real story in markets. That kind of volatility is a sign of a lack of conviction among investors about where they think economies are really headed.
It has left prices vulnerable to big moves on every new data item and rumour.
The still-unverified speculation of a short-selling ban in Europe was the prime example last night -- just as the sell-off in Societe Generale shares was a day earlier.
In the bond markets, the combination of its traditional safe-haven status and buying by the ECB kept prices firm.
French borrowing costs relative to German costs saw a string recovery. The yield on 10-year French bonds fell to 3.05pc, cutting the premium France pays to borrow, compared with Germany, which fell to 0.73pc from 0.87pc a day earlier.
French borrowing costs were better on the back of the previous day's statements from ratings agencies that the country was not facing a downgrade.
Spanish and Italian bonds continued recent falls yesterday, with borrowing costs for both now under 5pc thanks to bond purchases from the ECB. Ireland's 10-year borrowing costs were at 9.5pc yesterday. (Additional reporting Reuters)