Avenging Angela Merkel shorts the globe

Politicians will more likely close the markets before they let the euro break up.
Russell Napier, Strategist, CLSA Asia-Pacific Markets, to DNA on May 11

Germany’s move to ban naked short-selling in bonds, 10 financial institutions and credit default swaps on Wednesday is exactly per Napier’s prgnosis.

But, much to the relief of the markets, Angela Merkel, the German chancellor, stands alone — other eurokinder haven’t taken cue.
But ban in one place triggered a frenzy among global bears — markets after markets were shorted left, right and centre, causing a universal bloodbath.

The euro rose from a four-year low on speculation European leaders will take steps to support the currency.

The euro is at risk and the European Union may be facing its greatest challenge with “incalculable” consequences if leaders fail to act, German chancellor Angela Merkel told lawmakers in Berlin Wednesday.

“Investors have to be aware that politicians will go towards more regulation in the coming months,” said Markus Steinbeis, head of equity portfolio management at the Unterfoehring, Germany-based unit of Pioneer Investments, which oversees about $221 billion globally.

“Policy makers are going the easiest way and are blaming hedge funds for the crisis.”

Germany will act alone if necessary in controlling “destructive” financial markets, Merkel said, a day after the BaFin regulator banned naked short sales — speculating against companies investors don’t own — for 10 banks and insurers, as well as naked credit-default swaps on euro-area government debt.

As much as Rs 1.51 trillion of investor wealth got wiped off as the Sensex fell 467 points or 2.77% to a three-month low.

The Sensex last had a bigger fall on January 27 this year when it shed 2.92%. 

The benchmark Nifty broke its 200-day moving average of 4982 in the afternoon session.

“Those who had written the puts at 5000-5100 gave up finally and this covering led to unwinding of puts at these levels. Implied volatilities have risen sharply and we may witness some more downside pressure. There has been huge selling in cash market by foreign investors today and even shorts have been created in index futures,” said Siddarth Bhamre, fund manager-derivatives at Angel Broking.

FIIs net-sold Rs 1,383.91 crores equities as per provisional National Stock Exchange data. They have so far withdrawn Rs 5,429 crores in May.

“Global risk aversion is driving FII sales at this point of time. Also the US dollar strengthening will act as deterrent to fresh money inflows in the short term,” said Jitendra Panda, senior vice president and business associate at Motilal Oswal Financial Services.

The bad news is, the fall has come on very high volumes, indicating poor investor sentiment.

The cash market on Wednesday witnessed combined turnover of Rs 20,236.26, while the futures & options segment also saw high action with Rs 136,575.10 crore of trades.

Going ahead, experts believe there’s still some downside left.
“We may see further downside of 100 points or so for the Nifty. The 4800 puts are having the maximum open interest and there’s still no unwinding happening at these levels. Traders can go short if the Nifty touches 5100 levels and would be advised to square-off  at 4850 levels or so. Liquidity may be an issue in coming times as people are shifting from riskier assets to safer havens like gold and the US dollar,” said Bhamre.

“We may see markets consolidating around 4800 levels if the monsoon turns out to be good,” said Panda.