European bank stocks slid before rallying strongly as investors came to terms with the details of several short-selling bans imposed across Europe overnight.
European equity markets initially tumbled as banks came under attack in spite of the joint ban on short selling, through which investors aim to benefit from falling share prices, by France, Italy, Spain and Belgium. Greece and Turkey had already imposed bans.
While markets have experience with short-selling bans after a series were imposed in the wake of the collapse of Lehman Brothers in 2008, the rules usually differ between countries, causing confusion as investors, most of whom operate in many countries, struggle to factor in the bans and the impact on their holdings.
This time, for example all four countries have applied the restrictions to various stocks, but the French and Belgium rule changes do not appear to cover derivatives that are included in the Spanish ban.
The FTSE Eurofirst 300 fell more than 1 per cent in the first minutes of trade, undermined by the very banks that were supposed to derive protection from the ban. But it soon headed higher, and closed up 3.6 per cent at 968.21.
Regulators said they had put the ban in place in an effort to “restrict the benefits that can be achieved by spreading false rumours”.
After nearly an hour of trade, however, indices were higher and banks had recovered much of their losses.
Analysts agree that the bans tend to have a short-term impact because they so squeeze out short-sellers who are forced to cover, or buy back, the stocks they have shorted. However, the evidence from previous bans is that they do not have a long term impact. Most of the bank stocks covered by the 2008 bans, for example, continued to fall heavily.
Most analysts believed this ban would have little impact on overall market direction and the position of the banks.
“With deteriorating investor confidence in eurozone debt likely to continue driving reduced investor confidence in the ability of European banks to withstand the fall out from the eurozone debt crisis we doubt that downward pressure on European financials will now dissipate,” said Lee Hardman at Bank of Tokyo Mitsubishi UFJ.
Atif Latif at Guardian Stockbrokers agreed: “We think that although short sellers are active in the market there has been selling also due to uncertainty on fiscal and monetary policy issues that are yet to be resolved which results in natural selling of asset classes.”
French banks were higher. Société Générale added 5.7 per cent to €24.30, BNP Paribas climbed 4.2 per cent to €37.22 and Crédit Agricole gained 2.1 per cent to €6.52.
In Italy, UniCredit added 5.6 per cent to €1.05, while Intesa Sanpaolo climbed 3.2 per cent to €1.25. Spain’s largest two lenders also gained and Santander rose 6.6 per cent to €6.40, while BBVA added 6.2 per cent to €6.43.
London’s banks have recently been under pressure and they too rallied. Barclays climbed 5.3 per cent to 188.22p, Lloyds Banking Group gained 5 per cent to 33.82p and Royal Bank of Scotland added 4.8 per cent to 26.67p.
Meanwhile, in Germany, which also refused to put in a ban, Deutsche Bank rose 4 per cent to €30.29 and Commerzbank gained 5.4 per cent to €2.21.
Belgium’s Dexia moved up 17.3 per cent to €1.80.
France’s CAC 40 was up 4 per cent at 3,213.88. Italy’s FTSE MIB climbed 4 per cent to 15,888.61, while Spain’s Ibex index added 4.8 per cent to 8,647.3. Belgium’s BEL 20 index gained 5.5 per cent to 2,263.
Of the markets that declined to impose short-selling restrictions, London’s FTSE 100 climbed 3 per cent to 5,320, while Germany’s Xetra Dax added 3.5 per cent to 5,997.7.
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