Yesterday we saw another collapse on the euro just as signs that the currency had begun to dust itself off appeared. Germany’s move to ban 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 not taken as brilliant regulatory measure but instead as another major blunder by the ruling powers in Germany, truly a huge mistake in both timing and reasoning. What this ban means is that Germany banned naked short selling (selling something without having first bought it, or any plans to do so in the future) in shares of 10 financial institutions; CDS on European government bonds and some European government bonds. The practice is already banned in the U.S. and many other countries. Their reasoning behind all this is to end speculation that it says creates “excessive price movements” that endanger the stability of the financial system. The announcement officially took effect at midnight last night and will last until March 31, 2011. Germany defended it’s decision by stating the obvious: the steps were taken due to extraordinary volatility in the European government bond markets and that massive short selling could have endangered financial system stability. Well that worked out quite well at stabilizing the markets now didn’t it? Instead things have just gone from bad to worse.
At the same time Germany’s coalition government is also pushing for a global financial transaction tax or financial activities tax, a good idea that would have been better implemented long before now and would only cause more panic if enacted today much like the short selling ban. A financial transaction tax would put a tax on sales and purchases of financial products while a financial activities tax would be applied to financial institution’s profits and bonus payments for executives. Nothing wrong with skimming a little off the top when you’re already the one at the top to begin with. The probability of this actually passing is very low though, meaning the powers that be would rather waste time discussing a good idea that has come up too late, rather than practical solutions that could actually be enacted to save this currency before it collapses.
France’s Finance Minister Lagarde was quick to signal out Germany’s move from their own line of reasoning by saying France is NOT considering a ban on naked short selling in European debt and regrets unilateral decision by Germany on naked short selling. He went on to explain naked short selling of European debt is useful “for liquidity needs” and calls for meeting of European market regulators on sovereign debt naked short selling.
Consolidation was the name of the game after the smoke cleared from yesterday’s massive sell-off. It appears that the EUR/USD has found support at the 1.2135 level (50% retracement of all-time high/low.) Hedge funds continue to sell today while sovereigns lend much-needed periodic support. Market conditions remain very thin, and this mean we could see some very massive moves over the rest of today’s New York session. One would have to assume that decent stops exist below 1.2100. I’m at a loss as to how to call it, since less than an hour after I posted my analysis yesterday, the German’s bombed the FX market with their most recent bad idea. Who knows what’s in store for the rest of the week. Good luck to you all anyway!
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