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Monumental rally after FSA statement on short selling

Shares in London saw one of their biggest ever rises after two major pieces of news. First, from midnight last night, the FSA introduced new provisions to the Code of Market Conduct to prohibit the active creation or increase of net short positions in publicly quoted financial companies, and this effectively prohibits short selling in financials from now on. Second, US markets exploded last night on talk that Treasury Secretary Hank Paulson was set to unveil a new rescue plan that would create a vehicle to take on the US banks’ worst bad debts and help get them lending again. This evoked comparisons with when the saving and loans industry collapsed in 1989.

Consequently, the Dow Jones Index saw its biggest ever trading volume, and the FTSE 100 index was up over 6% in frenetic conditions mid-morning. Financials led the way with huge rises in HBOS, Lloyds TSB, RBOS, Bradford & Bingley and many others. We could conceivably see a very strong bull move while the shorts unravel these positions in coming days.

In other news, HSBC walked away from its offer to buy a 51% stake in Korea Exchange Bank, citing the current turmoil in the financial markets. A private equity consortium led by Providence Equity Partners scrapped its offer to buy Informa, reportedly due to problems raising the finance for the deal. This marks one of the first large deals to collapse since the onset of the credit crunch. GlaxoSmithKline confirmed that the Variable Sales Forward agreements with Lehman Brothers Finance SA had been terminated, and these related to 20m common shares of Quest Diagnostics.

Head of Research at Blue Index, specialists in trading

19/09/2008

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