Market Overview

How to Trade End of France and Belgium Short Selling Bans

France and Belgium have both lifted restrictions on the short selling of financial stocks that were put in place last year after several major European financial institutions saw their stock prices fall dramatically.

Stock prices for French banking giants BNP Paribas, Credit Agricole and Societe Generale took a beating last year when rumors began to circulate that they faced liquidity and short-term funding problems. Although the banks denied the rumors, the damage was done and their stock prices suffered for it.

At the time of the rumors and rapid stock price declines, many European leaders blamed short selling for the volatility in the stock market and the falling stock prices of major European financial institutions. France, Belgium and other European Union countries decided to implement restrictions on short selling the shares of financial institutions in an attempt to reign in speculative trading in these companies' stocks.

It's uncertain how much good the short selling ban actually did because the stock prices of European financial institutions continued to experience volatility as traders reacted to news coming out of Europe and downgrades by the ratings agencies.

Moody's Investors Service downgraded many of France's top banks about a month after the short selling ban was introduced. Among the concerns cited by Moody's was what effect a Greek default could have on French banks because they had a relatively large exposure to Greek debt. It didn't help matters when news broke that the Bank of China halted its FOREX swaps with several of Europe's top banks because it was concerned about the financial stability of the banks.

Things finally started looking better for European banks after European leaders made progress in improving the strength of the European Union's financial sector. France's Autorite Des Marches Financiers (AMF) and Belgium's Financial Services and Markets Authority (FSMA) decisions to end bans on short selling financial stocks could be due to the fact that European financial stocks have performed better this year, after the EU leaders moved aggressively to shore up the European Union's banking system.

The AMF announced that its ban on the short selling of financial stocks like BNP Paribas, Credit Agricole and Societe Generale was over in a short news release that offered no explanation for the AMF's decision to end the short selling ban. On the other hand, the FSMA explained the reasoning behind its decision to end its ban on the short selling of financial stocks.

The FSMA said in its press release that "given the improvement in market conditions, the competent authorities in the countries concerned are currently assessing whether the ban needs to be continued. In the midst of that process, France's ban expired on 12 February 2012. In reaching its decision, the FSMA has taken into account, among other things, the lower volatility of the markets and a consistent approach within the Euronext zone."

While its clear that Europe's financial institutions still face significant hurdles, the decision to end the ban of short selling financial stocks like Societe Generale and Dexia SA could be a sign that European finance ministers feel that the European financial sector is healthier than it was just a few months ago.


ACTION ITEMS:

Bullish:
Traders who believe that the end of the short selling ban is a good sign might want to consider the following trades:
  • European banking stocks like Banco Santander (NYSE: STD), Societe Generale (OTC: SCGLY) and UBS AG (NYSE: UBS) could move higher if the European financial sector is growing stronger.
  • The iShares MSCI Europe Financials (NASDAQ: EUFN) ETF is also worth a look. This ETF holds a broad range of European financial stocks, so it gives investors the benefits of diversification.
Bearish:
Traders who believe that the European financial sector is still in serious trouble may consider alternative positions:
  • Investors can use the removal of the short selling ban as an opportunity to short European financial stocks. A number of major European banks have recently reported disappointing earnings, so Europe's banking sector is still coping with the difficulties brought upon it by the Eurozone's financial crisis.
Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

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