Short-selling ban spurs market relief

London - European stock markets rose on Friday as a ban on short-selling financial shares prompted investors to creep back into battered banking shares, although concern over the health of French banks kept the mood edgy.

World shares edged up but were still poised to end another week in the red as investors continued to dump riskier assets, bringing losses so far this month to more than 10%.

France, Italy, Spain and Belgium have imposed a ban on short-selling in a group of banks and financial institutions, after a flurry of rumours - all officially denied - knocked a third of the value off some European bank shares.

Traders said the measure would provide temporary relief to jittery investors, but concerns about eurozone debt problems and the deteriorating global economic outlook were set to keep trading erratic.

“Something needed to be done, the rumours were silly and the market was full of emotion and fear. So this provides a break in that, so not bad,” a London-based fund manager said.

“I don’t think it works long-term but should buy some time.”

The FTSEurofirst 300 index of top European shares rose 1.4%, clawing back after falling more than 1% in early trade. The MSCI world equity index rose 0.3%.

The STOXX Europe 600 Banks index rose around 2%.

Shares in BNP Paribas and BBVA each rose more than 1%, but those in Societe Generale oscillated between positive and negative territory.

SocGen has borne the brunt of the banking sector sell-off, with its shares falling 33% so far this month as investors become more worried about the exposure of French banks to debt issued by Italy and other weak eurozone countries.

These concerns limited overall stock market gains, and the short-selling ban was not enough to convince investors to significantly extend the previous day’s sharp rally. European shares were poised to end the week nearly 3% lower.

Ion-Marc Valahu, who helps run Geneva-based fund management firm ClairInvest, said the short-selling ban might not have that much of an impact in the long term.

“In the short term it will help calm things down, but if you look at what happened at Lehman during the crisis, it didn’t do much,” Valahu said.

Rumours and volatility

Markets have been extremely volatile amid rumours about the health of European banks, mounting questions about the stability of money markets and growing fears that the US economy may tip back into recession or a prolonged period of tepid growth.

The rise in share markets drove the euro to a session high against the dollar, although traders said it remained at risk of renewed selling. Against a basket of currencies, the dollar was little changed on the day at 74.564.

German Bund futures rose in volatile trade as investors unnerved by the recent selloff in stocks and the escalation in the eurozone debt crisis flocked to the safest debt in the 16-nation bloc.

Oil prices fell, with Brent crude pushing as much as 1% lower on the day and reversing gains made in the last two days as concerns about dwindling demand from industrialised nations put some commodities under selling pressure.

The safe haven Swiss franc extended losses after a dramatic selloff the previous day as investors dumped the currency, given the possibility that the Swiss central bank may step up measures to stem its strength.

Analysts said the Swiss currency would continue to benefit from demand from risk-averse investors, but it remained at risk of near-term selling due to the possibility the SNB may soon implement drastic measures as a disincentive to overseas investors from holding too many francs.

“There is no end in sight to the eurozone debt crisis and the US slowdown, both of which are negative for risk and should support the Swiss franc,” said Gavin Friend, currency analyst at nabCapital.

“But there is something brewing on the Swiss side of things and if the SNB can manage to crimp demand for Swiss francs by pushing down yields and instigate even more negative yields, then we could see the euro rebounding.”