Yesterday my colleague and head of Financials, Josh Steiner, posted the note below. European capital markets were tagged hard again today following yesterday's announcement of short selling bans in Spain and Italy.
Spanish and Italian equity indices flashed a negative divergence today, closing down -4.8% and -2.7%, respectively. And sovereign yields bounced, with the 10YR jumping to 7.62% for Spain and 6.60% for Italy; this is a record high for Spain! Needless to say, Europe's "floor" is not fully priced in.
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Short Selling Bans Are A Great Indicator of Further Downside to Come
This morning, Spain and Italy banned short selling of all stocks, Spain for 3 months and Italy for one week. How will that work out for them?
If history's any guide, not well. Here's a look at how two short selling bans in the past fared.
1. On 8/11/11 France, Italy, Spain and Belgium banned the short-selling of bank and insurance stocks. As the following chart shows, the Euro Stoxx Bank Index went on to lose 21% of its value over the month following the ban.
2. On 9/18/08 the SEC banned short selling of Financial stocks. While there was a big one-day squeeze, the XLF went on to lose 76% of its value over the six months following the ban.
We have been, and remain, bearish on the Global U.S. Banks (C, BAC, JPM, GS, MS). One of the central tenets has been European counterparty exposure. As European bank stocks fall, they pull the U.S. Global banks down with them. As the two charts above suggest, short selling bans suggest there's more downside to come for both European and U.S. banks.
Joshua Steiner, CFA