Canada’s main stock index fell yesterday on persistent fears that austerity measures in Europe could stifle global growth, as Germany said it would restrict short-selling linked to Euro zone debt. Ongoing worries about Euro zone debt and the impact on economic growth kept some commodity prices lower, sending the energy and materials sectors down 0.7% and 0.5%, respectively.
Investor sentiment was also hit by worries about a U.S. financial regulation. In Washington, several Republicans will vote with Democrats to wrap up debate on the sweeping reform of financial regulations and move toward final passage. Separately, Germany said it will ban “naked” short-selling from midnight in shares of the country’s 10 most important financial institutions. In naked short-selling, a trader sells a financial instrument short, betting that it will fall, without first borrowing the instrument or ensuring that it can be borrowed, as would be done in conventional short-selling.
Germany’s ban on naked short-selling will also apply to credit default swaps on euro government bonds as well as euro government bonds. The move by German Chancellor Angela Merkel to ban speculation on European government bonds with the contracts sparked anxiety among investors about increasing government regulation. Merkel’s coalition is seeking to build momentum on market regulation as German lawmakers prepare to debate a bill authorizing a $1 trillion bailout to backstop the Euro. The surprise announcement, done outside the European Union, came after the rescue package failed to prevent a decline in the 16- nation common currency to a 4-year low and as banks became increasingly reluctant to lend to one another.
The Toronto Stock Exchange’s S&P/TSX composite index finished the day down 0.41%, earlier in the day the TSX climbed 1%. Oil prices fell ending at a 7-month low as Europe’s debt problems revived risk aversion among investors and pulled the euro and oil back from early gains. Oil prices settled at $69.41 a barrel, the lowest settlement since crude closed at $66.71 on September 29, 2009. Oil jumped in early trading to $72.52, then fell to a low of $68.91 on the day, off 20.9% from their 19-month high of $87.15 hit on May 3rd of this year.
Oil stockpiles have risen in the last 8 weeks to a record 37 million barrels, at the U.S. delivery point in Cushing, Oklahoma.
In the United States, stocks dropped and were driven lower as the strengthening of financial regulation from Wall Street to Frankfurt crushed bank stocks, adding to worries about the sustainability of the global economic recovery.
In short, it is a continuation of the uncertainty that’s been hurting the market. In the U.S. it is financial reform which is exacerbating an already uncertain environment in Europe.
The Dow Jones industrial average fell 1.08%, the Standard & Poor’s 500 Index fell 1.42% and the Nasdaq Composite Index fell 1.57%.
This morning stock index futures fell as markets are still rattled by Germany’s decision to ban naked short selling of certain financial instruments and comments from its chancellor that the Euro was in danger. As mentioned, Germany banned naked short sales, a move that appeared to surprise its partners in the European Union, who said they were not consulted. German Chancellor Angela Merkel said in a speech to parliament the Euro was in danger and urged speedy action to stop market “extortion” and said the EU needed a process for “orderly” insolvency of its members. European shares fell sharply as Germany’s move sparked concerns of tighter regulation.
Since the announcement of the rescue plan there seems to be less confidence as to how much it is going to cost and how it is going to get paid for. Instead, the 1st major announcement from European leaders is to say they are going to ban short selling of debt and equity, which sounds like panic. It also sounds like something that is being done unilaterally without discussion with other European nations.
Oil prices and the Canadian dollar have also declined in value. With sovereign debt in the forefront many investors are overlooking the fact that many companies are continuing to exceed investor expectations regarding earnings. Most recently both John Deere and HP have exceeded earnings expectations. Although Europe is a $12 trillion economy, investors fear that their issues could spread.
Regards,
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
