Yesterday, markets fell as the German regulators banned the naked short selling of European sovereign debt. Rumours that a European wide ban will come into effect have circulated today, resulting in further falls in the world’s major stock markets.
What is naked short selling?
Naked short selling is the selling of an asset where the seller isn’t in possession of the asset. They sell it now and agree to deliver the asset at a future date. When the date approaches, they buy the asset hoping it has fallen in value, in which case they make a profit.
Why is naked short selling bad?
When short sellers focus on one investment and see weakness, in this case Eurozone Soverign debt, they continue to sell aggressively, creating excess supply in a climate of weak demand. The result is falling prices. In the German regulator’s eyes, these speculators are driving down the price of government bonds and increasing volatility in the market. In the past, similar bans actually resulted in substantial increases in volatility, because the market lost confidence. Without global support, the ban will not achieve its objectives - speculators could simply trade these assets on a non-German market.
Why the market is sceptical.
The solution Germany has put in place with the International Monetary Fund only works for Greece; it is not scalable to the other PIGs (Portugal, Ireland, Greece and Spain). The price of European government debt is falling because the Eurozone has failed to convince markets that they have a credible plan to address the huge sums the PIGS continue to borrow.
Our view
Naturally, investors will want to know how to protect or perhaps even profit in these uncertain times. The first and obvious point will be to maintain a well diversified portfolio, with no excessive risk concentrations.
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If there is anything you wish to discuss please call one of our Investment Professionals on 020 7189 9999.