Having already lost 5.8 percent last Friday, the Spanish stock market lost another 5.3 percent early Monday morning before rebounding to close down only 1.1 percent. The rebound came after a short-selling ban instituted by the Spanish stock-market regulator took effect. The ban will bar speculators from borrowing stock and selling it and it will extend to all stocks and OTC derivatives, not just financials, and will last for at least three months, but possibly longer.
So far this year, the Spanish stock market has lost 27.9 percent of its value, compared to a gain of 7.3 percent for the S&P 500. Spanish Economy Minister Luis de Guindos called the market behavior “irrational” and also excluded the possibility of a full-blown Spanish bailout request.
The Spanish central bank released a report Monday showing that the preliminary estimate for second-quarter GDP was a decline of 0.4 percent quarter on quarter; an acceleration from the previous decline of 0.3 percent.
Other Markets Also Suffer Across the Continent
The euro common currency briefly dipped below $1.21 Monday before stabilizing. Ironically, the market that closed down the most was Germany, losing 3.2 percent after falling as much as 3.5 percent. Traders attribute this phenomenon to the short-selling ban in Spain and Italy, which has spillover effects for Germany.
Despite the fact that the German economy is the strongest in Europe on a relative basis, investors can still sell stock short in Germany whereas they are no longer allowed to perform this operation in Spain and Italy. This is a short-term disadvantage, as traders and investors use the German market to hedge eurozone related risks. This phenomenon was also observed during the last short-selling ban in the fall of 2011.
Despite the current market turmoil, Graham Seckers, head of European equity strategy at Morgan Stanley, sees value in shares trading across the Atlantic: “Europe has begun to outperform the U.S. over the last month or so and we think the trend could continue in the coming months. The valuation starting point remains very compelling in Europe’s favor,” wrote Seckers in a note to clients.
Distortion in Fixed Income Markets Signals Danger for Euro
Spanish 10-year bonds already traded above 7 percent last week, but on Monday the shorter dated 2-year bonds also were sold heavily and risk premiums spiked to 6.53 percent, a 16-year high. The market is now pricing short-dated risk very similar to longer dated risk with the difference in yields between the 10-year and the 2-year bond falling, a process called “curve flattening.”
The Citigroup technical team around Tom Fitzpatrick interprets this negatively for the euro currency: “The last time this [flattening] happened was in early November 2011 when we also saw other major markets turn for the worse. EUR/USD for example fell some [six dollar cents] that month. The support level on EUR/USD is at 1.1876 (2010 low).”