Business World

Friday 24 January 2020

Merkel's ban sends wrong signals to the markets

Germany's move on short-selling ban causes further wave of share, bond sales

German Chancellor Angela Merkel. Photo: Getty Images
German Chancellor Angela Merkel. Photo: Getty Images

Emmet Oliver Deputy Business Editor

MARKETS around the world continued to fall last night and nervousness grew despite attempts by Germany to stop traders speculating against indebted European economies.

An attempt by German Chancellor Angela Merkel to rein in speculators and calm currency and debt markets appeared to be backfiring. The US and all other European markets failed to join the Germans in their ban on naked short selling of European bonds.

Michel Barnier said the rules would have been "more efficient" if the moves were coordinated within the EU.

The Irish Financial Regulator is in contact with other European regulators about the ban, but so far it has shown no sign of introducing a ban relating to short selling of bonds.

It does have one in place preventing short selling of Irish bank stocks. Irish bond yields were broadly flat yesterday, although yields on shorter term money dropped by 10 basis points.

"It is moralistic hysteria," said Charles Dumas, research director at Lombard Street Research in London, of the German move.

"If she starts a heavy push to try and broaden this thing out to become a European rule, it could cause a lot of trouble''

US stocks fell for a second day as Germany's ban on certain bearish investments and a jump in mortgage foreclosures to a record triggered a flight from equities.

Boeing, United Technologies and 3M slid more than 1.6pc helping lead declines in the Dow Jones Industrial Average. American Apparel fell 24pc after saying it anticipated it would not be in compliance with debt covenants.

The S&P 500 fell 0.3pc to 1,117.13 in New York after sliding 1.4pc on Tuesday. The index pared a loss of as much as 1.8pc after it slipped below its average level over the past 200 days and financial shares erased losses. The Dow Jones Industrial Average lost 46.33 points, or 0.4pc.

The German ban concerns credit default swaps, a form of insurance on bonds and other securities. Credit-default swaps are instruments that pay the buyer face value if a borrower -- a country or a company -- defaults. In exchange, the swap seller gets the underlying securities or the cash equivalent.

"We're watching Europe confront some of these headwinds," said Lawrence Creatura, a Rochester, a fund manager at Federated Investors., which oversees $350bn.

"People are worried about another step down in global demand. We're all one big world now, and there is fear that economic difficulties there may infect us on this side of the Atlantic."

The JPMorgan G7 Volatility Index, which measures the perception of risk in the currency market, rose for a fourth consecutive day

Merkel told lawmakers in Berlin that her country would act alone if needed, saying the national ban will last until a European solution is found. She said the ban on naked short-selling is part of her proposals to gain control over "destructive" financial markets.

The euro is at risk and Europe may be facing its greatest challenge since the founding of the European Union, with "incalculable" consequences if leaders fail to act, Merkel said.

Irish Independent

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