Strong rebound after a preliminary agreement on lowering production of the OPEP… to be continued !
03 October 2016
What a busy week ! This week was marked by growing pressure on the Deutsche Bank, leading to pressure on the German equity markets.
“The DB story” has been going on for months and there was some new developments in the latest days:
- The US Department of Justice announced a USD 14bn fine leading DB equity price down and all correlated assets moved accordingly (Euro banks slump, bonds get richer, etc.)
- Then DB management announced the fine will be reduced significantly : DB equity price bounced back, along with other related assets
- And Thursday night, latest episode, some major hedge funds were said to stop trading with DB and moving out cash from their prime brokerage account driving equity down again, etc…
Markets seem to recover this afternoon, but we will probably experience new rounds of stress in the coming weeks.
DB complies however with regulatory ratios and has some significant cash buffer, so where is the problem coming from?
The problem comes from the very low market capitalization (EUR 14bn as of today) and the climate of distrust that prevents them to refinance through fixed income markets.
Hence, at the slightest problem, market anticipates a capital increase and shareholder dilution, which provokes equity price meltdown, which makes recapitalization even harder, and equity price keeps going south.
In the end, the issue is obviously about trust: when market deems DB is robust enough to cope this episode, all will get better. However, if other financial institutions begin to doubt the bank’s survivorship, things can go very fast.
Lastly, there is of course a political element to this. German leaders have been fighting for European countries – Italy amongst others – to stop bailing out troubled banks with public money. This has created tensions between the countries' leaders during the summer, and it is therefore very difficult for them to support DB publicly.
Other major issue, OPEC meeting reportedly has reached a consensus on production cut in November. This could reduce production by 500k barrel per day. It remains to be seen whether this cut is actually implemented, but for the moment crude is up, back to its USD 48-49 high.
Elsewhere, this week hosted the first debate between Trump and Clinton. As usual, markets have a rough time pricing political events and there is always some volatility. Clinton is seen as the debate winner.
Apart from this, macro-economic data is decent:
- Eurozone: IFO was very good and inflation in line, without any sign of acceleration
- US: disappointing real estate data, durable goods orders were in line, consumer confidence was great, as were Chicago and Michigan PMI
La Française’s Essentiel Markets brings you an insightful analysis of the latest financial news by François Rimeu, Head of Total Return at La Française Asset Management.