Europe: The War Is On

With Germany‘s latest efforts to maintain political control over the financial markets, the first shot has been fired in what to appears to be Europe’s next big war – the fight against so-called “speculators.” The ban on short selling of financial stocks and naked Credit-default Swaps is just the beginning. The market participants are responding by sending the euro to a new four year low, stocks drop and commodities slide.

“This is a mistake of a serious fundamental nature and of severe consequence.”

Mark Grant

Stocks around the world went straight into free fall and metals dropped as the euro tumbled down to a new a four-year low after Germany banned speculators from some bets against government bonds and banks. The measures are being described as “meaningless,” “desperate,” and as an attempt to make the public believe that the European politicians still can control the financial markets.

The German efforts to maintain political control over the rising public anger against the financial industry took an almost tragic-comic twist yesterday, when Germany imposed a unilateral ban on the short selling of euro zone government securities, and the shares of ten financial institutions.

The ban took effect midnight.

This ban is said to be temporary, and extends to naked Credit-default Swaps.

The euro plummeted on the news, and is Wednesday morning trading around 1,21 against the dollar.

At 2:59am (CET) the euro hit $1,21431 – the lowest level since April 2006 when it touched down on 1,20320.

The MSCI World Index lost 1.2 percent in London this morning, ten-year U.S. note yields slid 2 basis points to 3,33% and 10-year German bund yields fell 5 basis points to 2,77%.

Oil slumped to a seven-month low near $68 a barrel – copper dropped 1,9%.

Making Bad Worse

“It almost looked panicked, which further undermines confidence in the markets,” Michael O’Rourke, chief market strategist at BTIG LLC in Yardley, Pennsylvania, says in a comment to Bloomberg News. “They’ve done as poor a job as one can do in delivering a message.”

“If you don’t feel like you can sell bonds and equities in Europe, you’re left with selling the euro to express a negative view,” says Greg Gibbs, a foreign-exchange strategist at Royal Bank of Scotland Group Plc in Sydney. “The ban creates a view that the authorities sense bigger problems than what may appear on the surface, creating more nervousness and fear.”

“This is a mistake of a serious fundamental nature and of severe consequence,” managing director of Southwest Securities Inc in Fort Lauderdale, Mark Grant, writes in a note to institutional clients.

Germany is making “an obvious attempt to control financial markets across the globe by this action just as they plead for investors to provide funding,” he says.

Clueless Politicians

The political idea is to show one’s determination against the greedy speculators who apparently destabilizing the euro.

The problem is only that there is hardly any CDS trading in Germany. Most of it is in the UK.

It is inconceivable that the new Tory/Liberal government in Britain will support the German measures.

Another highly symbolic – and ultimately not very important – decision was taken yesterday by the Ecofin, which approved its version of the Alternative Investment Fund Mangers Directive, to regulate hedge funds.

And there is more to come.

Merkel is pressured by her party into accepting a new tax on the banking system.

On Sunday, the German chancellor explicitly reject the idea of a financial transactions tax as unworkable, indicating that she would not push the idea, as the there is no chance of it being accepted by the US and the UK.

But on Monday, her parliamentary party had a collective nervous breakdown, and came out in favor of a financial transaction tax – a long-standing demand by the SPD and the Left Party.

Merkel’s increasingly desperate party managers maintain that this was all her big idea, the eurointelligence.com writes.

Another Fraudulent Package

As Spiegel Online pointed out in its main report this morning, the whole purpose of this debate and the naked CDS ban is to assuage enraged public opinion.

But in reality it is another fraudulent package –  its purpose is to give the impression that the political system is still in control.

Alexander Hageluken writes in Sueddeutsche writes that a tax on bank profits and salaries is a better idea than a transaction tax, because the latter would penalize small savers as well.

In his FT Deutschland column Wolfgang Munchau describes the entire debate is a sick joke.

A Sick Joke

“They meet secretly in a hotel to discuss how it breaks the € and destroying our social order. They speak English, have crooked noses, and if they blow the attack, then they fall upon us like locusts, grazing everything. They use modern derivatives in order to push their bad game, and whatever emanates their game to win it. The bill paid the unsuspecting German taxpayers – as always,” Munchau writes.

And continues:

“Perhaps this caricature of the German political debate is exaggerated. But the reason why I,  in the assessment of the Euro-crisis in recent weeks, was increasingly pessimistic, is a general outbreak of stupid and dangerous populism.”

“Rather than dealing with the crisis of the euro zone, the heat is over bust-Greeks and speculators. Instead of presenting a reasonable plan on how to manage the single currency effectively, they shoot over the sidelines to score politically points.”

“It certainly has been speculation, but the extreme fluctuations in European capital markets has nothing, absolutely nothing to do with speculation. The reason for the rising market interest rates in Greece and later Portugal and Spain, is because of selling by real investors such as pension funds and insurance companies,” Wolfgang Munchau points out.

Market Snap Shots

Here’s some illustrations of Wednesday’s market movements.

It’s been a long time since we’ve seen this kind of volatility.

(Charts updated at 12:30pm CET)

EUR/USD:

EUR/JPY:

EUR/GBP:

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Related by the Econotwist:

E.U. Ministers Fail To Agree On Bailout Details; Run On Euro?

Euro: $1,22 – Panic In Brussels

The Euro Is Going Down; Now Trading Below $ 1,24 (Update)

Killing My CDS Softly

Breeding New Watchdogs

Banks Protesters Storm Irish Parliament

ECB Announces Bailout Program

Europe Is Cracking Up

Bailout Euphoria Is Evaporating

Scandinavian Reactions To E.U. Measures: “We Are Not Safe”

Bank Funding Crunch Deepens as Swap Rates Soar

E.U. Prepared To Set Up Own Rating Agency

Europe To Fight Speculators With “Secret Plan”

Fitch Warns Of New Speculative Oil Spike

European Banks Loaded With Greek Debt

Gerald Celente: “The Great Crash Has Occurred”

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