Trade of the Week: Porto shorto
The fate of Portugal’s bailout returned to the top of policymakers’ concerns this week, as the resignation of a key government minister prompted market falls in the country's banks.
Trade of the Week: Porto shorto
With stocks in Portugal’s domestic banks facing significant pressure, the country’s stock-market regulator on Wednesday introduced a 24-hour short-selling ban until midnight on Thursday to protect three beleaguered institutions – but wily traders who acted quickly could have got away with a healthy profit.
The three banks that are subject to the short-selling ban ̶ Banco Comercial Portugues, Banco Espirito Santo and Banif-Banco Internacional do Funchal – provided opportunities for traders shorting stock ahead of the ban.
From Tuesday's close to Wednesday's lowest point, shares in Banco Comercial Portugues fell by 16%, while shares in Banco Espirito Santo fell by 14%. But Banif Banco Internacional do Funchal's shares experienced the sharpest fall at 43.5%.
If a trader had borrowed and sold €1000 of stock in Banif Banco Internacional do Funchal at Tuesday's close of €0.092 per share and bought them back at Wednesday's lowest point of €0.052, they would have made a profit of around €434.
Despite the downward pressure on stocks, macro credit research from RBS offers a more optimistic view of Portugal's banks, arguing that they rank higher than most Italian and Spanish banks in stress tests conducted by the firm’s analysts.
“In particular, Banco Espirito Santo and Caixa Geral de Depositos appear as the most resilient, also benefiting from limited holdings of sovereign debt compared to other banks in the periphery,” noted the research.
Alberto Gallo, managing director and head of European macro research credit markets at RBS, said: “Our view is Portuguese banks can withstand a lot of shocks…Unfortunately until German elections, PGBs [Portuguese government bonds] as well as equity prices are going to be volatile, but banks and corporates are solvent despite the volatility, and we remain long on their bonds.”
Portugal’s market turmoil began with the resignation of finance minister Vítor Gaspar, a former European Central Bank official who has played a key role in the Portuguese government's attempts to implement austerity and stick to the terms of an agreed €78bn bailout.
The government has come under increasing pressure to row back on its commitment to the programme by opposition parties and trade unions.
Stewart Cowley, head of fixed income and macro at Old Mutual, said that the resignation of Gaspar provided the country with a particular challenge.
“Fundamentally you’ve got a problem, as the guy who resigned is an architect of the Portuguese bailout, and to find someone with equal experience may be difficult,” he said.
Gaspar's replacement has been announced as treasury secretary Maria Luis Albuquerque.
Cowley also pointed to structural problems in the Portuguese economy with lagging GDP figures and inaction on controlling the country's budget deficit.
He added that the peripheral eurozone economies had been rocked by signs that the US Federal Reserve is looking to reign in quantitative easing.
“US interest rate rises had such an effect on peripheral markets in Europe ̶ the Fed has effectively been sponsoring low interests rates in Europe which aren’t sustainable. That’s why the peripheral economies are back in the frame,” he said.
