Equities
European shares dropped on Friday with a hefty $14bn fine against Deutsche Bank (DE:DBKGn) proposed by the US Justice Department dragging on lenders, whilst EU leaders (minus the UK) met in Bratislava.
European benchmarks slid over 1%, with the German DAX, home of Deutsche Bank and Italy’s FTSE MIB, which has listings for Monte dei Paschi amongst other troubled lenders, leading the declines.
Deutsche bank shares slumped as much as 8%. The Euro Stoxx Banks index was down -1.6%. The decline in DB shares was the biggest since the day after the Brexit vote. The fine would be to settle an investigation into the mis-selling of US mortgage backed securities. The $14bn would be about 80% of Deutsche Bank’s market cap and may dissuade employees from following CEO John Cryan’s recent advice to “be more daring.”
The $14bn was a shock because it completely eclipses the $2-3bn that had been rumoured. Deutsche Bank came out fighting, saying it does not plan to settle the claims “anywhere near the figure cited.” As a point of reference, for similar claims Citigroup paid $7bn, Bank of America $16.7bn and Goldman Sachs settled for $5.1bn this year.
Just because it’s not a US bank, it doesn’t mean Deutsche Bank will pay less; in fact it could be the opposite. British lender Barclays and Deutsche Bank were once top-ranked dealers in the US mortgage market. Tit-for-tat of fines between European and US regulators could mean the eventual figure is higher than Deutsche Bank could otherwise have hoped for.
A slump in the shares of Barclays (LON:BARC), Standard Chartered (LON:STAN) and Royal Bank of Scotland (LON:RBS), all of whom have faced the wrath of US regulators in recent years dragged on the FTSE 100.
Healthcare stocks including Shire (LON:SHP), AstraZeneca (LON:AZN), and GlaxoSmithKline (LON:GSK) led the gainers on reports Mediclinic was preparing a bid for the remainder of Shire. The South Africans are making their move.
Mediclinic, if it were to successfully bid for Shire, would be the second South African firm in as many months to use the drop in sterling against the rand to takeover a British company after Steinhoff’s acquisition of Poundland.
US stocks opened lower on Friday in a pullback from big gains made yesterday as investment bank Goldman Sachs cut its S&P 500 and bond market outlook to ‘underweight’. The stronger consumer inflation and steady consumer sentiment were seen as reasons the Fed could decide to lift rates before the end of the year.
FX
The US dollar was stronger across the board on Friday following data showing higher than expected US inflation in August. US core CPI, a measure closely watched by the Federal Reserve now stands at 2.3% y/y, up from 2.2% in July. Annual inflation in the US, stripping out food and energy costs has exceeded the Fed’s 2% inflation target for 10 months.
The biggest contributors to the price rise were healthcare and rent costs, neither of which are a function of an expanding US economy. A combination of Obamacare and price gauging for speciality drugs has pushed up the cost of health insurance whilst house prices propped up by super-low interest rates are seeing rent prices increase.
Strength in the US dollar and talk of another rate cut from the Bank of England saw the British pound fall to a two-week low against the US dollar. GBP/USD re-tested 1.31, having been above 1.33 at the start of the week.
Commodities
Stronger US inflation data is too little too late for the Fed to hike rates this month but does increase the odds of a move before the end of the year. Gold, which is sensitive to US rate expectations, fell to a two-month low.
A dynamic not currently under consideration for the price of gold is runaway inflation. If interest rates remain at record lows when core consumer price inflation continues to increase beyond 2% annually, the market may lose faith in the Fed’s ability to control inflation. Gold is the ultimate inflation hedge.
The resumption of exports from Libyan ports in combination with strength of the US dollar, in which oil is denominated weighed on Brent and WTI crude prices, both of which finish the week lower.
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