Market Chaos Warning! Shock & Awe Phase II

Getting more serious:

On UK Telegraph: Market chaos warning after German ban on shorting

• The unprecedented step saw the euro sink to a four-year low after Germany said that from midnight shorting of credit default swaps of any European government would be banned. The prohibition is an attempt to counter speculators that Berlin believes are trying to destabilise the region's sovereign bond market.
  
  Traders greeted the move by BaFin, the German regulator, with a mixture of anger and astonishment. One bond trader said he expected Wednesday's trading session to be one of the most volatile in living memory: "It will be complete chaos, I really don't know what the Germans think they are doing."
  
  One immediate effect was that the cost of insuring European government debt fell as markets were hit by a so-called "short squeeze" where investors with short positions are forced to offload their holdings and buy the bonds, causing the price to increase.
  
  This is certain to please the German authorities, who have waged an increasingly hostile war of words with supposed speculators.
  
  BaFin said the ban was being introduced due to "extraordinary volatility in debt securities issued by eurozone countries".
  
  In a statement, it said short-selling had led to excessive price movements "which could have led to significant disadvantages for financial markets and have threatened the stability of the entire financial system". However, traders said that the measures, which will also prohibit the naked short-selling of shares in major German financial institutions, such as Allianz. Commerzbank, and Deutsche Bank, could lead to an immediate backlash from investors around the world.
  
  They added that the ban was likely to be effectively unenforceable. It will not stop traders from shorting the bonds and shares using other European markets.
  
  "Without the two-way flow the German market is likely to become utterly dysfunctional," said one London-based bond trader. "Nobody ever thought they'd do this in a million years and it raises the long-term question of who is now going to want to buy their debt."
  
  Germany, like other European governments, must raise hundreds of billions of euros by selling new bonds, but banning short-selling could jeopardise demand.
  
  Analysts at Bank of America Merrill Lynch summed up the mood with a note titled What's Germany going to ban next? Rainy days, harsh words, the Macarena?
  
  US shares fell as traders began to assess the consequences. After an early rally, the Dow Jones closed down more than 100 points, despite a day of gains for European markets.
  
  The German authority's actions echo those taken by many major Western governments in the wake of the financial crisis in late 2008 following the collapse of US investment bank Lehman Brothers. Britain and the US both temporarily banned shorting bank shares, fearing that speculators could cause the collapse of other major financial institutions.
  
  Speaking to Reuters, Lawrence Glazer, managing partner of Boston-based Mayflower Advisors, said: "The motive is probably more towards limiting volatility and trying to prevent some sort of raid on debt, or equities. We have seen this before, but whenever you see any type of regulatory changes it is worth paying attention."

Here are some comments from Mish: Shock & Awe Phase II: Germany to Ban Naked Short-Selling at Midnight; Politicians Battle Markets; Short Selling Restrictions and Market Crashes

• We have seen this play before. It's hopeless....
• Politicians cannot battle markets and expect to win. Wage price controls do not work. The Bazooka ploy failed a dozen times, and the ban on short selling financials in the US failed miserably....
  
  All these short sale restrictions are going to do is create a vacuum. Once the shorts are driven out these shares will plunge.
  
  If history is any guide, there will be a brief rally in German banks, followed by a collapse of unknown duration. Politicians are not bigger than the markets, no one is.
  
  However, politicians can and do frequently exaggerate the existing trend. In this case, the trend is down. Short sellers are not the problem, if anything, short sellers are the cure, exposing problems and failed policies that politicians refuse to address.

Sadly but true.

One DO NOT GO SHORT without any justification. Why? That's suicidal.

Germany should seriously ask themselves if the shorties have a very strong reasoning to do what they are doing.

And naturally the Euro is getting whacked silly... (them Euro shorties are laughing yet again to the bank, eh? )

• TOKYO (Dow Jones)--The euro fell to a fresh four-year low against the dollar in Asia Wednesday, as investors in the region dumped the common currency on the view that new German financial regulations will complicate managing the risk of holding the currency.
  
  The new rules announced overnight may make both short-term and long-term investors increasingly eager to further trim their euro holdings. The regulations are also likely to weigh on European equities later in the global day, further hurting the risk-sensitive currency, dealers said.
  
  In morning trade in Tokyo Wednesday, the euro dropped to $1.2143, its lowest level since April ... source

On Bloomberg: Euro Falls to 4-Year Low, Yen Jumps on German Speculation Ban

• “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,” said Greg Gibbs, a foreign-exchange strategist at Royal Bank of Scotland Group Plc in Sydney. The German ban “creates a view that the authorities sense bigger problems than what may appear on the surface, creating more nervousness and fear.”
• “The regulatory step in Germany did little to soothe speculative selling on the euro and rather underscored the lack of solidarity in the euro zone,” said Mitsuru Saito, chief economist in Tokyo at Tokai Tokyo Securities Co. “No one can dismiss entirely the worst-case scenario in which the single currency will fall apart.”

On Zero Hedge: The Definitive Incomplete Analysis Of Today's German Shock And Awe

• As BaFin has yet to provide details of the naked short ban, here is the best "incomplete" analysis of today's events, written by BofA's Jeffrey Rosenberg.
  
  Cleaning up the spill without stopping the leak
  
  Today’s actions by the German Financial Regulator BaFin prohibiting naked short selling continues a long simmering approach to the European sovereign debt crisis that we believe mistakes financial market uncertainty for the cause of the crisis rather than its effect. Drawing an analogy to the other major headlines of the day, attempts to curtail the sovereign debt crisis through curtailing trading activity is like trying to clean up the Gulf oil spill without stopping the leak. Budget deficits are the leak in this analogy and are similarly extremely difficult to fix. By confusing the cause for the effect the policy response exacerbated rather thanameliorated market uncertainty and with concern over the loss of ability to hedge long positions, investors sold what they could with the declines in the Euro leading risk markets lower and US Treasuries higher in a flight to quality.
  
  Creating confusion: the BaFin ban
  
  Today, the BaFin announced a series of short-selling bans aimed at reducing financial system risk. The bans will begin at midnight tonight (18th-May) and last until 31 March 2011 (10.5 months). The ban will apply to naked short-selling of credit default swaps and Euro-area government bonds. In addition, the ban will apply to naked short-selling in shares of 10 German banks and insurers. The 10 names are: Allianz, Deutsche Bank, Commerzbank, Deutsche Boerse, Deutsche Postbank, Munich Re, Hannover Re, Generali Deutschland Holding, MLP and Aareal Bank.
  
  So what does that mean?
  
  We have more questions than answers at this point. First, naked short selling is well defined for cash markets – stocks and government bonds. It bans the selling of those when the seller can not deliver the asset to the buyer (within a proscribed period of time). These bans were put permanently in place for example in the US during the credit crisis. For CDS, “naked short-selling” is not well defined. There is no delivery of an underlying instrument in a short risk position in CDS (buying protection), hence some other definition of what “naked” means for CDS will be required. How “naked” is defined could render market making difficult or impossible. Enforcement is unclear as well as the jurisdiction of trading to which the BaFin ban applies. That latter point could become moot were FSA and othernational regulators to follow suit with similar bans. Finally the scope of what “Euro area” debt means remains undefined.....