By Patrick Chu May 19 (Bloomberg) -- Asia stocks dropped to a three-month low and metals tumbled after Germany banned speculators from some bets against government bonds and financial institutions. Treasuries rallied. The MSCI Asia Pacific Index lost 1.3 percent to 114.95 at 12:55 p.m. in Tokyo. Standard & Poor’s 500 futures fell 0.6 percent following a 1.4 percent decline in the index yesterday. The euro weakened below $1.22 for the first time since April 17, 2006 before recovering. Yields on 10-year Treasury notes slid 2 basis points to 3.33 percent. Oil slumped to a seven-month low below $68 a barrel and copper dropped as much as 2.8 percent. German Chancellor Angela Merkel’s government shook investor confidence with the new regulations. The nation’s BaFin markets regulator banned investors from naked short sales -- speculating on declines of stocks they don’t own -- for 10 banks and insurers, as well as naked credit-default swaps on euro-area government bonds starting today. “It almost looked panicked, which further undermines confidence in the markets,” said Michael O’Rourke, chief market strategist at BTIG LLC in Yardley, Pennsylvania, which serves institutional investors. “They’ve done as poor a job as one can do in delivering a message.” The rules hurt demand for European assets on concern that investors will face challenges hedging their holdings or selling assets. The euro weakened to as low as $1.2144 before recovering at $1.2217. The pound slumped to a 13-month low of $1.4278 and the yen gained against all 16 major counterparts. The German ban will last until March 31, 2011, BaFin said yesterday in an e- mailed statement. Concern Increases “If you don’t feel like you can sell bonds and equities in Europe, you’re left with selling the euro to express a negative view,” said Greg Gibbs, a foreign-exchange strategist at Royal Bank of Scotland Group Plc in Sydney. The ban “creates a view that the authorities sense bigger problems than what may appear on the surface, creating more nervousness and fear.” The MSCI Asia Pacific Index has declined 11 percent from its high for the year on April 15 as Europe’s debt crisis and concern China will quell inflation eroded investor confidence. A decline of 10 percent is the level some analysts refer to as a correction. All stock markets in the Asia Pacific region fell. Japan’s Nikkei 225 Stock Average dropped 0.9 percent. South Korea’s Kospi Index slumped 1.4 percent and Australia’s S&P/ASX 200 Index declined 1.4 percent. Hong Kong’s Hang Seng Index retreated 1 percent. Share Movers Nippon Sheet Glass Co., which gets 42 percent of its revenue from Europe, tumbled 3.6 percent to 243 yen in Tokyo as a stronger yen dimmed the earnings prospects for Japan’s exporters. Daiwa Securities Capital Markets Co. cut its rating on the stock to “neutral” from “outperform.” Canon Inc., a camera maker that counts Europe as its largest market, retreated 1.1 percent to 3,930 yen. Materials companies posted the biggest declines among the MSCI Asia Pacific Index’s 10 industry groups. Woodside Petroleum Ltd., Australia’s second-largest oil and gas producer, dropped 1.3 percent in Sydney to A$42.50 after oil retreated for a seventh consecutive day. Crude oil for June delivery declined as much as 1.9 percent in New York. Rio Tinto Group, the world’s third-largest mining company, fell 1.7 percent to A$62.76. Banks Fall Financial-services companies dropped as European deficit concerns caused the cost of protecting Asia-Pacific corporate and sovereign bonds from non-payment to rise. The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan rose 10 basis points to 131.5 basis points, Royal Bank of Scotland Group Plc prices show. HSBC Holdings Plc slumped 1.3 percent to HK$72.45 in Hong Kong. Commonwealth Bank of Australia, fell 1.8 percent to A$51.70 in Sydney. Guangzhou R&F Properties Co., the biggest real estate company in the southern Chinese city, dropped 1.3 percent after Goldman Sachs Group Inc. downgraded Chinese developers. Shimao Property Holdings Ltd., controlled by billionaire Xu Rongmao, lost 1.2 percent. Yanlord Land Group Ltd. declined 1 percent. Short Selling Short selling involves the sale of borrowed securities in the hope of profiting by buying them later at a lower price and returning them to the owner. When securities are sold naked, the trader fails to borrow the assets before sending an order to sell. BaFin will prohibit trading in credit swaps on euro-area governments that aren’t used to hedge against losses in the event the government defaults, the regulator said. BaFin said it was taking the step because of “exceptional volatility” in euro-area bonds. “Massive” short-selling was leading to excessive price movements which “could endanger the stability of the entire financial system.” “This is a mistake of a serious fundamental nature and of severe consequence,” Mark Grant, managing director of Southwest Securities Inc., in Fort Lauderdale, Florida, said in a note to institutional clients. Germany is making “an obvious attempt to control financial markets across the globe by this action just as they plead for investors to provide funding,” he said. The MSCI World Index of stocks in 23 developed nations slipped 0.7 percent, erasing a 1.3 percent rally. European financial markets closed before BaFin posted the ban. The Stoxx Europe 600 Index ended the session up 1.3 percent. To contact the reporter on this story: Patrick Chu in Tokyo at pachu@bloomberg.net;

Source