The late selling in banking shares that dragged US markets lower late yesterday could well follow through into today’s US open as markets in Europe dropped sharply, with banking shares bearing the brunt as concerns about Deutsche Bank (DE:DBKGn) resurfaced after overnight news that some hedge funds were reducing their exposure to the bank.
Under any normal situation this probably wouldn’t be worthy of mention, but in banking perception is everything, and in times of stress investors tend to shoot first and ask questions later and when confidence starts to leak away the ensuing drip can very quickly turn into a waterfall.
This will inevitably turnout to be a huge headache for the German government and how they react in the coming days is likely to be key in how this eventually plays out.
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.
Credit Suisse CEO Tidjane Thiam’s comments that European banks aren’t investable probably weren’t the wisest remarks to make either, after all if one of the CEO’s of one of Europe’s biggest banks doesn’t think European banks are investable why should anyone else?
This eagerness to wrap up a deal by the DoJ means time is pressing for Deutsche in terms of getting the $14bn compensation figure lowered, as well as looking at ways to bolster its balance sheet in the aftermath of any deal to cope with additional litigation costs and other potential shocks.
Today’s sharp drop has seen Deutsche Bank’s shares drop below €10 for the first time ever to trade at a new record low, though we have since rebounded.
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.
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.
The 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.
The Dow Jones is expected to open 20 points lower at 18,123
The S&P500 is expected to open 3 points lower at 2,148
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