Volatility and massive losses have been a global theme over the past two weeks, culminating in the biggest single day drop in decades. Yesterday, March 12, Madrid’s benchmark index fell by 14%, Milan’s market went down by 17%, and European markets overall saw their worst day since the 1987 stock market crash. The spread and effect of COVID-19 is still to be determined, but what is very clear is the economic impact on Spain and Italy. In response, regulators in both countries announced short sale bans on 69 Spanish stocks and 85 Italian stocks in an effort to mitigate further loses. They both also asked other nations to consider instituting a similar ban on their companies listed on foreign exchanges.
In response, the London Stock Exchange announced a ban on shorting more than 120 names including Fiat Chrysler, Santander, Airbus and the Juventus Football Club, amongst others. That said, Germany announced that it will not institute any bans on short-selling like the U.K., Spain and Italy. Clearly, these are not universal actions that have or will be taken by all European nations.
The move is not unprecedented. In the 2011 eurozone credit crisis, short-selling bans were in effect. Even before that, during the 2008 financial crisis, regulators banned shorting for a number of issuers including many large banks. None of these actions solved the respective crises but were done to try and stop massive single-day losses like we saw on Thursday.
On a broader level, similar bans may continue. As of Friday, many markets have shown signs of rebounding, although nowhere close to being fully recovered. Central bank activity and actions in Europe appear to be, at least at the current time, ineffective. As a result, financial regulators will likely continue actions to help ease the markets and try to stop the bleeding anyway they can.
Turkey and South Korea also announced similar short-selling bans in response to crashes given the extent their countries have been hit by COVID-19.
In the U.S., there has been no indication that there will be any short-selling bans. The U.S. did places these bans for certain companies during the 2008 financial crisis, so it is not outside the realm of possibility if we see large drops next week.
Greyline will continue to monitor actions taken by regulators in response to current market conditions.
