The whole world is still stunned from what just happened today. In essence, Germany has taken a major step to not only declaring it is the master of the European continent and all those who don't like it can just focus on their own bankrupt banks (Sarkozy), but is breaking ranks with the US, as the surprising nature of today's move was aimed not so much at European "speculators" but at Wall Street. Furthermore, knowing full well it may soon lose access to US capital markets, Germany is likely preparing to abandon the EU and EMU (to which "good riddance" is likely all it has to say). But the key implication from today is that Bernanke must now move with urgency to find a way to keep the pressure on the dollar as he is now solidly losing the currency devaluation race. The impact of this on major multinationals and on the "must do" reflation experiment could be cataclysmic. Additionally, without gobs of new domestic liquidity to prop it up, the US market will now likely collapse, further forcing Bernanke to act against the interests of the US Middle class and America's savers. We can not wait to see what he pulls out of his sleeve. With ZIRP ravaging the nation, and negative interest rates still illegal, he may just find his hands very much tied.
In the meantime, here are some preliminary shocked observations on today's events from Goldman Sachs and Morgan Stanley.
GS' Erik Nielsen:
I just landed in Heathrow to find the astonishing headline that the german finance minister reportedly is planning a ban on shorts (of what?). - and I found dozens of emails from people asking what's going on.
Dirk Schumacher is on the case and will report as soon as he gets any clarification. His immidiate reaction was that it might be a political statement to help ease through the vote in the german parliament on the mega package on friday.
Germany’s Bafin has just put out a press release banning short selling of sovereign CDS starting tonight and lasting through March 31, 2011, possibly inspired by the UK and US banning of shorts at the height of the financial crisis (Reuters’ English translation of headlines below)
In our view, its likely that this drastic move has been triggered by the planned passing by parliament of the German share of the EUR 440bn package on Friday. Dirk Schumacher, who also just landed has heard that there seems to be more resistance to the help package than previously thought.
So far, we have not heard of similar moves in other Euro-zone countries, but it seems likely that several of them might follow suit later this week. As I discussed in my note on Sunday, policymakers are determined to protect the Euro-zone, and they have identified the financial markets as the key obstacle for stability, which implies risks of further regulation.
Stay tuned as we learn more
Dirk & Erik
19:28 18May10 RTRS-GERMANY'S BAFIN ANNOUNCES BANK ON NAKED SHORTSELLING OF CDS ON EUROZONE GOVERNMENT BONDS
19:31 18May10 RTRS-GERMANY'S BAFIN SAYS BAN TAKES EFFECT FROM MAY 19 TO MARCH 31, 2011 AND 'WILL BE CLOSELY MONITORED'
19:32 18May10 RTRS-GERMANY'S BAFIN SAYS BAN ON SHORT-SELLING ALSO APPLIES TO SHARES OF 10 LEADING FINANCIAL INSTITUTIONS
19:33 18May10 RTRS-GERMANY'S BAFIN SAYS STEP 'DUE TO EXTRAORDINARY VOLATILITY WITH GOVERNMENT BONDS IN EURO ZONE'
19:35 18May10 RTRS-GERMANY'S BAFIN SAYS MASSIVE SHORT SELLING COULD HAVE LED TO EXCESSIVE PRICE MOVEMENTS
19:36 18May10 RTRS-GERMANY'S BAFIN SAYS MASSIVE SHORT SELLING COULD HAVE ENDANGERED FINANCIAL SYSTEM STABILITY
19:40 18May10 RTRS-GERMANY'S BAFIN SAYS SHORT SELLING OF SHARES BANNED AT AAREAL BANK AG, ALLIANZ SE, COMMERZBANK AG
19:40 18May10 RTRS-GERMANY'S BAFIN SAYS SHORT SELLING OF SHARES BANNED AT DEUTSCHE BANK AG, DEUTSCHE BOERSE AG, DEUTSCHE POSTBANK AG
19:41 18May10 RTRS-BAFIN SAYS SHORT SELLING OF SHARES ALSO BANNED AT GENERALI DEUTSCHLAND HOLDING AG, HANNOVER RUECKVERSICHERUNG AG
19:42 18May10 RTRS-BAFIN SAYS SHORT SELLING OF SHARES ALSO BANNED AT MLP AG AND MUENCHENER RUECKVERSICHERUNGS-GESELLSCHAFT AG
and Morgan Stanley:
EUR/USD plunged to a fresh 4-year low this afternoon. Reports that Germany's financial services regulator BaFin will issue new restrictions on short selling appeared to be the key catalyst sparking widespread EUR selling. To some extent, the surprise announcement was interpreted as another incremental measure treating one of the symptoms of the problems in the Eurozone, rather than getting to the direct cause. In that regard, the lack of a comprehensive plan is feeding into market concerns about the credibility of EU policymakers in dealing with the spillover from sovereign risk issues (this is similar to the challenges US authorities faced in 2008). In addition, the announcement may have the unintended consequence of channeling more investors into short EUR positions. If investors cannot express negative views on the EU in the bond or CDS markets, short EUR could prove the path of least resistance.
The volatility the announcement sparked in equity markets, spilled over into FX as a safe-haven bid. The USD appreciated against higher-beta currencies such as the AUD, NOK, SEK and ZAR. The Japanese yen also posted strong gains on the day.
Earlier today, we took partial profit on the core short EUR/USD position in our model portfolio after the pair touched our initial target of 1.24. But given our medium-term bearish outlook, we maintain a 15% allocation to short EUR/USD. While the short EUR trade appears to be increasingly crowded, the unexpected nature of the policy announcements is increasing market volatility and weighing on sentiment. Moreover, EUR/USD also seems to be taking its cue from risk aversion. Though it is difficult to gauge how persistent this latest bout of risk aversion is likely to prove, our GRDI indicator remains in deep risk aversion territory, below the -2 standard deviation mark. The downtrend in EUR is getting increasingly sloppy, but the momentum does not seem to be fading.
What is hilarious about the Morgan Stanley note is that less than 12 hours ago the firm sent out the following:
We have decided to take partial profit on the core short EUR/USD position in our model portfolio, paring down the position to 15% from a 25% allocation and tightening our trailing stop-loss to 1.34. This trade was initiated originally on December 17, at an average entry level of 1.4085, and we are exiting at 1.2365, locking in a gain of 12.6%. Year-to-date, our model portfolio has generated an unlevered return of 4.81%, with the short EUR/USD position accounting for a large portion of this performance.
While we retain a negative medium-term view on EUR/USD, we believe that short positioning and bearish sentiment have reached extreme levels, raising the potential for a bounce. Indeed, our momentum indicators suggest that the four-week decline in EUR/USD is the sharpest since the single currency was launched in 1999. This would imply that many investors have added to short EUR positions at weak levels. In addition, the IMM Commitment of Traders Report on Friday showed that net EUR short positions expanded to -114k, a new record that roughly mirrors the +120k record net long in EUR positions back in May 2007.
This suggests that the saturation point in EUR net shorts is within reach.
Though we see downside risks to the EUR stemming from weaker growth and spillover from the sovereign risk concerns, the emergency measures recently adopted by European Union policymakers are likely to lead to some stabilization in the short term. The ECB’s liquidity provisions should help to calm markets and the pre-emptive fiscal tightening taken by some peripheral eurozone governments should help to mitigate contagion concerns.
However, since many of the policies enacted so far have not addressed longer-term structural threats facing the eurozone, we would look for opportunities to re-set shorts. We also believe that the EUR will prove vulnerable to signs that the nascent eurozone expansion is struggling. We view 1.28-1.32 as a favorable sell-zone for EUR/USD.
We will offer additional details regarding our views in the FX Pulse this Thursday.
Just goes to show once again, that the bulge brackets are about as good as predicting the future as your ordinary run off the mill deranged gambling coin tosser.