Short selling is banned for some stocks, and banned here in Australia totally, and yet the markets rise here and in Asia.
Then Europe and the US tank, but the shorts are out of the market, so what’s gone wrong?
The US dollar turned and commodities rebounded strongly as markets took fright at the ramifications of not only the $US700 billion bailout plan, but its transformation into a garbage bin for all sorts of failed financial assets, even shares.
US bank stocks fell 11% without a short in sight. Goldman Sachs fell, Morgan Stanley was flayed, and Well Fargo, Washington Mutual and Wachovia all saw big falls. Oh, and the fall in the US dollar saw our currency rise 2 US cents to be over 6 US cents higher since Friday.
Oil surged, jumping $US25 a barrel at one stage, before settling back to close at $US120 a barrel, and those big gas guzzlers are looking bad again, as is the Holden Commodore and the Ford Falcon. Oil eased in Asian trading to around $US109 a barrel.
And, we saw a huge “short squeeze” in oil as financial investors (AKA speculators) paid heavily for being short oil on Friday ahead of the expiry overnight of the October crude contract on the Nymex exchange, the most important futures market for oil around the globe.
There were reports some “shorts” were squeezed so heavily that big losses were taken. If they had been unable to buy back and cover their sold positions, these investors would have had to take delivery of the oil to fulfill their sales deals of last week.
And, despite our total ban on shorts, the local market will open down 2%. And not a short seller in sight.
What part of the past 24 hours do you understand? That should be the question.
Some US commentary is suggesting that the plan to end the rout in financial markets may derail the greenback’s rally since mid-July as investors weigh the costs of the rescue. The brawling in Washington is nauseating as financial groups and others push for the ability to dump their dodgy loans on the Government and escape big losses and even ruin.
Some shareholders in the stricken insurer, AIG, want to have a shareholder vote to reject the Government offer: if that was to happen, the slump would be back on big time and not many would survive the implosion.
Morgan Stanley sold 20% of itself to the Mitsubishi banking group of Japan after it and Goldman Sachs abandoned the investment banking model and moved to become regulated banks overseen by the Fed and by other banking regulators. So no more masters of the universe left on Wall Street, just mini-me’s inside banks like Citigroup, Bank of America, Deutsche Bank and the like. Independents like Macquarie Bank now look lonely.
Investment banking won’t die, it will just be different. Principal and proprietary trading, huge leveraged positions and investing new forms of finance will have to be done by someone else. Just deleveraging Morgan Stanley and Goldman Sachs will hurt.
More and more hard heads in the markets are coming around to the idea that the more toxic the bailout fund becomes as it is stuffed full of dodgy assets of all kinds, and altered to accommodate Democratic political agendas, the more selling the US dollar appeals as an option. And as we know, when that happens, commodities, especially oil, gold, copper, grains and a host of other products, get some price benefit, even if demand from the tanking global economy limits some of these price gains.
And that’s what happened overnight.
There had been early signs Friday night with the US dollar weakening and oil, copper and some other commodities rising.
Gold rose $US40 to over $US909 an ounce and copper jumped by more than 9 cents to $US3.2685 a pound. It later eased to around $US3.25 a pound.
The US dollar plunged by the largest amount ever against the euro, hitting and falling past $US1.4800 and the Aussie dollar jumped more than 2 Us cents to top 85 US cents. It’s now around 84.30 US cents.
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