Editor’s note: This article was first published in August 2012; the IBEX levels, the expected recession in September/October and the two-week forecast it discusses were tied to that moment and have long expired. The short-selling ban mentioned is the one imposed by Spain’s market regulator, the CNMV, in 2012.
“Markets are underestimating the extent of the global recession. Markets will have to come back down to earth, and they will do so in the next two weeks.” That is the message some fairly significant fund managers are putting out today. European stock markets have entered a rally not seen for more than five years (despite the corrections of the last two days).
If we look at the macroeconomic data, we should not rule out a final, full-blown recession in September or October, and not only in Europe but also in the United States, China and other emerging economies, which will start to lose steam. So the optimism in the stock markets clearly doesn’t make sense. Looking at the situation, it would be more likely for our IBEX to be struggling not to lose 5,000 points than trying to break above 7,200. And that is where the problem lies: many experts had not counted on investor optimism, and we are about to make some fund managers and investment funds lose a few tens of billions.
As we already know, a ban on short positions was introduced; in other words, betting on falls in Spanish shares and against the index itself was prohibited. The measure banned opening new short positions or increasing existing ones, but the ones that already existed are still there. As it happens, a large share of these short positions fall due between late August and early September. So if the rally continues, or investor optimism stops the markets from falling to 6,000 points or below, certain fund managers and hedge funds are going to make the worst deal of their lives, which will mean billions in losses and some very unhappy clients.
What will happen over the coming weeks?
Over the next two weeks we will watch as we are flooded with new worries, gloomy economic forecasts, new “ultra-negative” data and doubts about Europe’s recovery from the crisis. Spain will once again be the main target of attack. They won’t tell us anything we don’t already know, but they will say it in a way we can’t imagine, because they need to call on their old friend “panic”.
Statistically, when attacks like this are launched, they usually achieve their goal. So unless European politicians come out with big news, announcing that measures already agreed are being put into practice, we will see a new downward rally.
For those who want to see how the news media are manipulated when big money is at risk: grab a chair and some popcorn, and enjoy the show over the coming weeks.
