Short sellers try to exploit speculation of a French downgrade

HEDGE funds have been circling Australian bank shares in the past week, betting the fractures emerging among European lenders could also send down local stocks.

By InvestSMART · 12 Aug 2011

By InvestSMART ·
12 Aug 2011

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HEDGE funds have been circling Australian bank shares in the past week, betting the fractures emerging among European lenders could also send down local stocks.

About 20 per cent of the share turnover of the big four banks in the past few days has been linked to hedge funds.

Macquarie Group has been most targeted, with nearly 30 per cent of its turnover being caused by short selling, according to figures supplied by the ASX.

During the height of the global financial crisis, Australian securities regulators banned short selling of banking stocks. That ban was lifted in mid-2009.

Local bank shares took another roller-coaster ride yesterday and many were down as much as 4 per cent amid a global sell-off that caused some of Europe's biggest banks to suffer a rout.

A shift in market mood later triggered a rebound and the big banks finished higher.

Macquarie Group was worst hit. At one point it was down 6.2 per cent on concerns global economic turmoil and market panic could further erode its profitability. It ended the session down 1.9 per cent.

The global banking system was shaken on Wednesday night as shares of French banks were sold heavily in Europe because of spreading fears that France's AAA-credit rating could be cut, given the cost of bailing out Europe's troubled economies.

Societe Generale, the second-biggest French bank, was worst hit, its shares slumping as much as 21 per cent before closing down 14.7 per cent. Shares in BNP Paribas, France's biggest bank, fell 9.5 per cent.

But the three key credit agencies repeated that the outlook on their AAA ratings was stable. Also, Societe Generale "vigorously and categorically" denied all negative market rumours about its financial health.

Though European banks have been working to offload their exposure to Greek bonds in the past year, they still have a large exposure.

US banks were caught in the sell-off. Bank of America was down nearly 11 per cent, Citigroup 10.5 per cent and Goldman Sachs 10 per cent.

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Frequently Asked Questions about this Article…

What caused the recent selling pressure on Australian bank shares?

Hedge funds ramped up short selling amid a global banking sell-off sparked by fears about European lenders — especially speculation that France's AAA credit rating could be cut. That contagion pushed local bank stocks lower before a later rebound.

How much short selling activity was linked to the big four Australian banks?

According to ASX-supplied figures in the article, about 20% of the share turnover for the big four Australian banks in the past few days was linked to hedge funds and short-selling activity.

Was Macquarie Group specifically targeted by short sellers?

Yes. The article says Macquarie Group was the most targeted, with nearly 30% of its recent turnover being caused by short selling, and it was the worst-hit bank during the sell-off (down as much as 6.2% intraday, finishing the session down 1.9%).

Why were French banks sold heavily in Europe and how did that affect global markets?

Shares of French banks plunged on fears France's AAA credit rating could be cut because of the potential cost of bailing out troubled European economies. That panic hit European banks like Societe Generale and BNP Paribas and fed a broader global banking sell-off that also dragged down US and Australian bank shares.

What did credit rating agencies and Societe Generale say about the downgrade rumours?

The three main credit agencies reiterated that the outlook on France's AAA ratings remained stable, and Societe Generale 'vigorously and categorically' denied the negative market rumours about its financial health, according to the article.

Did regulators ban short selling of bank stocks during the financial crisis, and what’s the current status?

During the global financial crisis, Australian securities regulators banned short selling of banking stocks. That ban was lifted in mid-2009, and short selling has been in play since then.

How exposed are European banks to Greek bonds and why does that matter to investors?

The article notes European banks have been working to offload exposure to Greek bonds over the past year but still have large remaining exposure. That lingering exposure can increase sensitivity to sovereign-debt worries and contribute to market volatility.

What should everyday investors take away from this short-selling and downgrade speculation episode?

The episode highlights how global events — like downgrade speculation and concentrated short selling by hedge funds — can quickly shake local bank shares and create sharp intraday moves (falls and rebounds). Everyday investors should be aware that cross-border banking news can drive volatility and affect domestic bank stocks.