Naked selling? GBP down EUR down further
The big event of yesterday came after the close of European trading as Germany announced a ban on naked short selling 10 different German financial institutions as well as Euro bonds and credit default swaps. Naked shorting is selling an instrument or share without holding or borrowing what you are selling. The authorities gave the markets only a few short hours to close their open positions, and the resulting waves of panic led to a drop in the stock markets in the US and Asia with European stocks certain to drop this morning. The France and other EU members are expected to follow the German example, and the main driver of the action is a fear that the investors may switch their speculative actions away from Greek bonds towards the institutions that have started to back the EU bailout. The decision show a lack of confidence in the markets, and it has led to investors looking instead to short the Euro rather than the individual stocks, which has brought the single currency to below 1.22 against the Dollar in overnight trading.
The actual Greek bailout started yesterday with a €14bn loan allowing Greece to pay off it’s immediate debt, and there was some good news as Ireland successfully managed a bond auction with only a small increase on the yields it has to pay. However this is all overshadowed by the German action, and the fears are that the ban will dry up some liquidity in the Eurozone bond markets. Not only has the Euro fallen, but the rise in risk appetite has also weakened the Pound which had fallen to below 1.4250 overnight, before recovering to sit around 1.43 this morning. The Euro has sank faster allowing the Pound to rise above 1.18 overnight,, although again the market has retreated a but leaving the rate around 1.1750.
The action by Germany overshadowed all other events yesterday, although the UK’s surprise rise in inflation was mostly shrugged off by the markets anyway. Inflation was about 0.3% higher than expected, but with little chance of this changing the MPC monetary policy, it had little effect on the Pound. If the higher levels of inflation continue then it will start to cast some doubt on the MPC’s forecasts for inflation to fall under the 2% target, something to which there is already some doubtful mutterings in the media.
There’s no fresh UK data out today, but we do have the latest MPC minutes. The MPC Meeting was held just after the election so there is little chance of anything controversial being said, but after yesterday’s inflation figure, the minutes will be looked at to see if there is any uncertainty over the MPC’s previous confident predictions. Elsewhere we get the US CPI figure, expected to come in at a relatively benign 2.4%, and the latest Fed meeting minutes, although these won’t be released until after the close of UK trading. The markets are likely to be focused on the results of Germany’s action, and will be watching to see if any other EU nations are going to follow, if they do then you can expect the Euro to slip lower still.