Equities
Global markets were rocked on Friday by fears that Deutsche Bank (DE:DBKGn), Germany’s biggest lender was nearing its own “Lehman Brother moment.”
Markets in Europe dropped sharply, with banking shares bearing the brunt as concerns about Deutsche Bank resurfaced after overnight news that some hedge funds were reducing their exposure to the bank.
Hedge funds adjusting exposure in any normal situation wouldn’t be worthy of mention. The trouble is that investors are getting twitchy about an unconfirmed $14bn fine owed by Deutsche Bank to the US Department of Justice. Any sign that Deutsche bank’s sophisticated clients are feeling the same twitchiness as investors causes a mass crisis of confidence.
Sentiment towards banking stocks hasn’t been helped by reports that the US Department of Justice is looking to agree a combined settlement with Barclays (LON:BARC), Credit Suisse (SIX:CSGN) as well as Deutsche Bank before the US presidential election in early November.
Deutsche Bank shares recovered all of the day’s sharp losses on rumours the fine will be announced at the weekend as $5.4bn. Even at $5.4bn, Deutsche Bank would likely to raise capital, though the size may make a rights issue more palatable and makes a government bailout much less likely.
Commerzbank (DE:CBKG) shares have also come under renewed pressure along with the rest of the European banking sector. UK banks haven’t escaped unscathed either with Barclays and Royal Bank of Scotland (LON:RBS) also coming under pressure.
RBS’s tribulations with the Department of Justice are expected to be concluded separately along with HSBC and UBS.
The rally seen in basic resource stocks that we saw yesterday in the aftermath of the OPEC afterglow has seen some of those gains unwind this morning as oil prices drift back from their recent peaks.
After an early wobble, stocks in the US rose in early trading as fears that Deutsche Bank’s trouble would impact the US bank sector begun to ease. Deutsche Bank’s US-listed shares rose over 6%, pulling the big American banks including JP Morgan Chase (NYSE:JPM) higher with it.
FX
On the economic data front the numbers have taken somewhat of a back seat but it is clear that the Bank of Japan faces a mountain to climb as CPI came in at -0.5%, staying negative for the sixth month in a row.
As a result of this morning’s turmoil the Japanese yen and US dollar have been the main beneficiaries. Flows out of Europe and into the US has helped bolster demand for the US dollar. US personal spending and personal income data met expectations.
The British pound has continued to struggle despite a further rebound in consumer confidence in September, while the latest Lloyds (LON:LLOY) Business Barometer also improved in September.
Today’s final iteration of UK Q2 GDP came in at 0.7%, beating expectations, while business investment rose 1% in the second quarter confounding expectations of a much smaller rise, confounding claims that the Brexit referendum had prompted a slowdown. The services sector also improved rising 0.4% in July and 0.6% on a 3 month basis.
Commodities
Oil prices were firmer on Friday, ending a week of big gains following the decision from OPEC to cut production at its official meeting in November. The scepticism around the workability of OPEC’s deal explains why Brent crude is stuttering at $50 per barrel. The sense is that until the details are ironed out, the preliminary agreement could oil price range shift higher, with a new base around $45 per barrel in Brent.
The drop in equity markets and growing fears of a European banking crisis have done little to trigger safe-haven demand for gold.
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