Following yesterday's paradoxical S&P surge catalyzed by a bevy of dreadful economic news, the overnight session has seen some good old "risk off" mood which first hit European shares as a result of the previously reported $14 billion DOJ claim against Deutsche Bank, which sent Europe's biggest bank tumbling, dragging the banking sector lower, while a continued drop in the price of oil pushed energy companies lower, and then spilling over to US equity futures which were down 10 points at last check.
In early trading, DB was trading down around 8%, while Deutsche Bank’s €1.75 billion of 6% additional Tier 1 bonds, the first notes to take losses in a crisis, fell 4 cents to 79 cents. The bank’s 650 million pounds of 7.125% notes dropped 5 pence to 81 pence on the pound on concerns the bank may be forced to shore up billions more in liquidity.
“The Deutsche Bank news kind of rattled markets,” said Jasper Lawler, an analyst at CMC Markets in London. “It just goes to show that we’re still dealing with the same old headwinds: this low-interest rate environment, which will go on for a while, and the regulatory scrutiny.”
"None of the European banks has settled with the DOJ on RMBS yet so Deutsche Bank is the first to enter negotiations with Barclays, UBS, Credit Suisse and RBS also facing this issue,” RBC analyst Fiona Swaffield said in note. “We would expect Deutsche Bank’s final settlement to be significantly below the starting negotiation amount as seen at other banks although it remains uncertain where the final settlement will end up and the final impact on the capital ratios. Resolving this issue remains key for Deutsche Bank as it will give more clarity on capital, although there are a number of other moving parts – namely the Russian equities investigation and also the IPO of Postbank.”
The markets' attention was so
focused on DB in particular, and European banks in general (Italy's
perpetually insolvent Monte Paschi was halted after falling as much as
7.8%, after a report the bank’s recapitalization could be done through a
private placement to institutional investors and a voluntary
subordinated bonds conversion with minimum threshold, along the lines of
Greek banks’ recapitalizations, Il Sole 24 Ore reports, as the
previously planned bailout appears to have failed to attract attention),
that risk off flows finally prompted some buying of the German long
end, which saw the 30Y Bund yield slide from 0.7% nearly 10 bps lower.
Additionally. Germany’s 10-year bund yield fell four basis points,
dropping below zero for the first time in a week, and wiping out a
weekly increase that had been driven by the European Central Bank
failure to flag an immediate expansion of bond-buying program.
Lenders fell the most of the equity gauge’s 19 industry groups, with Deutsche Bank tumbling 6.8 percent. The German lender said it’s not willing to pay the claim from the DOJ to settle an investigation into its sale of residential mortgage-backed securities. Credit Suisse Group AG and Royal Bank of Scotland Group Plc slid at least 3 percent. Energy companies were the second-worst performers after banks, while Fiat Chrysler Automobiles NV retreated 1.9 percent after saying it’s recalling about 1.4 million cars and trucks in the U.S. Health-care companies, deemed safe in times of economic turmoil, posted the best performances. British private-equity firm SVG Capital Plc gained 4.6 percent after saying an unsolicited bid by HarbourVest Partners LLC undervalues the firm and that it has other offers.
Deutsche Bank’s woes are adding to the worst week in a month for European stocks, after global markets were shaken by concern central banks in the euro area and Japan are becoming hesitant to boost stimulus. The cost of insuring corporate debt has increased this week by the most in three months, commodities prices have tumbled and yield curves have steepened. The Bank of Japan will conclude a policy meeting on Wednesday, the same day as a Federal Reserve decision.
The MSCI Asia Pacific Index was up 0.6 percent, trimming this week’s drop to about 2.2 percent. Philippine stocks dropped by the most in three months. Markets in mainland China, Taiwan, Malaysia, South Korea and Hong Kong were closed for holidays.
S&P 500 Index futures slipped 0.2 percent, after a rebound in
consumer and health-care companies pushed equities up 1 percent on
Thursday.
Elsewhere in bond land, Portuguese bonds extended their slide, pushing the 10-year yield to the highest since June 24, when the U.K.’s Brexit vote sparked selloff of higher-yielding assets. S&P Global Ratings set to review the nation’s debt Friday. Other peripheral bonds also trailed behind German securities as Bundesbank President Jens Weidmann said the ECB should continue following its capital key rule when acquiring bonds under its quantitative-easing program.
Long-term bonds in the U.S. took a knock this week, lifting the 30-year yield to levels last seen in June, amid speculation monetary loosening around the world has about run its course. Japan’s 30-year yield climbed to a six-month high during the week and rates on short-term securities fell on bets the BOJ will adjust policy to steepen the yield curve. The rate on notes due in September 2046 increased by four basis points to 0.56 percent.
In other key overnight news, Japan’s central bank remains completely confused what it should do next
week, while Japan's finance ministry said it will probably closely
examine what’s going on with Chinese purchases of Japanese securities
and act appropriately; ECB’s Villeroy says ECB’s policy effective, to
continue in this direction; ECB’s Jazbek adds ECB policy working, no
need to change it for now; Merkel says EU survival at stake as chiefs
plot post-Brexit path; while
Market Snapshot
- S&P 500 futures down 0.5% to 2127
- Stoxx 600 down 0.3% to 339
- FTSE 100 down 0.2% to 6715
- DAX down 0.5% to 10384
- German 10Yr yield down 4bps to -0.01%
- Italian 10Yr yield down 3bps to 1.31%
- Spanish 10Yr yield down 1bp to 1.06%
- S&P GSCI Index down 0.7% to 347.1
- MSCI Asia Pacific up 0.6% to 137
- Nikkei 225 up 0.7% to 16519
- S&P/ASX 200 up 1.1% to 5297
- US 10-yr yield down 2bps to 1.67%
- Dollar Index up 0.09% to 95.38
- WTI Crude futures down 1.1% to $43.41
- Brent Futures down 1.2% to $46.01
- Gold spot up less than 0.1% to $1,315
- Silver spot down 0.2% to $18.96
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