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Market Comment 24th July 2012

The panic that has amassed over the last couple of trading sessions has been compounded by bans to short selling by both the Spanish and Italian regulators. 

When investors are scrambling for the exit and many looking to cover their long exposure they find that they can’t hedge long positions and in many cases meaning they have to sell outright. Not only are such bans counterproductive by reducing liquidity, but they instil panic at a time that confidence is paramount and ultimately they don’t prevent an asset that is doomed from being sold aggressively pushing its price lower and lower. If a company looks like it is going to go bust then no investor is going to hang around to pick up the pieces. They are going to run for the exit faster than you can say “sell” and no ban on shorting is going to make it ease the pain. It’s short sightedness such as this that prevents accurate free market pricing but for the regulators they can say to the wider community that it is doing “something” to prevent “spivs and speculators” from driving share prices lower.

Of course it had to be the regulators of the countries that are at the epicentre of the crisis who have imposed the bans adding to the worry and uncertainty that’s spooking investors. It comes as little surprise but begs the question, is there something they know that we don’t?

Also this morning we have seen Moody’s put financial power house Germany on downgrade watch which has prevented the FTSE from adding to our earlier calls of a positive open. In fact the index opened higher by some 20 points and has already reversed those gains swiftly taking us into the red. With question marks over the prized triple A credit rating of Europe’s largest economy the markets are likely to remain on the back foot, and to add to Germany’s issues this morning they have just seen their manufacturing and services PMI survey released worse than expected. Growth in the eurozone is very hard to come by nowadays and this is affecting Germany’s activity too as well as here in the UK. Just a couple of days before the Olympics are due to start tomorrow’s UK GDP figures will be closely watched.

Rising uncertainty regarding the Spanish regional governments’ debt triggered fresh concerns that Europe’s crisis could get worse driving US markets lower yesterday, but they managed to bounce from their lows which has helped prevent a wider sell off in Europe so far this morning. The troika are due to visit Athens today to see how Greece is getting on with its reforms and attempts to reduce their vast debt mountain. If there are more calls for funding to stop, as rumours have suggested in the case of the IMF making such threats, then another bout of fear could get investors reaching for the sell button.

Despite closing rather flat for the day at $1.2114, the common currency reached another record low at $1.2065, last seen in June 2010. The driver behind it was undoubtedly an increase in the number of regional governments asking for financial bailout in Spain which saw its yields on the 10 year bonds rising to another record of 7.59%. There don’t seem to be many buyers out there willing to take the single currency and this morning EUR/USD is at 1.2105.

Gold declined $7.10 to $1576.50 pressured by a higher greenback as the euro zone crisis seems to be worsening. The yellow metal failed to attract safe haven demand which instead went into the US dollar. However, in the bigger picture the $1560 - $1590 sideways range remains firmly in place.

The WTI crude prices tumbled sharply yesterday losing $3.47 to $88.14 on renewed concerns over the soaring cost of borrowing in Spain. That easily trumped geopolitical worries in Iran and reports of a pipeline explosion in Turkey. A stronger US dollar gathering pace is also working against any meaningful attempt to push crude oil higher.

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Market Comment 24th July 2012

The panic that has amassed over the last couple of trading sessions has been compounded by bans to short selling by both the Spanish and Italian regulators. 

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