Concerns About Deutsche Bank Raise The Spectre Of Lehman 2.0

Originally published by AxiTrader

Quick Recap

Markets have been to this rodeo before and they won’t like it.

I’m referencing Deutsche Bank AG (DE:DBKGn) NA O.N. (NYSE:DB) and the contagion that is starting to grip banks, possibly markets, after a Bloomberg story that counterparties are reducing excess collateral held with Deutsche. The bank fell in New York ADR trade.

That's not good for risk assets like the AUD/USD.

What You Need To Know

International

• A game of two halves with the FTSE 100 up 1% driven sharply higher by some huge rallies in global miners after upgrades. But Deutsche Bank’s woes knocked the S&P 500 and other US indexes for six as traders fear that they’ve been to this rodeo back in 2007, 2008, and 2009.

• So at the close the Dow Jones Industrial Average is off 195 points for a loss of 1.07%, the Nasdaq 100 is down 0.79%, and the S&P 500 dropped 16 points to 2154 for a drop of 0.76%.

• And here is the 5 minute chart showing the breaking DB news hitting the bank and the market more broadly.

• Deutsche Bank shares fell 8% on record volumes in New York trade overnight after a Bloomberg report that some DB clients had reduced collateral on trades. Bloomberg said “While the vast majority of Deutsche Bank’s more than 200 derivatives-clearing clients have made no changes, some funds that use the bank’s prime brokerage service have moved part of their listed derivatives holdings to other firms this week, according to an internal bank document seen by Bloomberg News”. This is how modern banking runs start – with a loss of confidence.

• But this is particularly important in Deutsche Bank’s case because it is at the very heart of global finance. Where many banks, like Wells Fargo (NYSE:WFC) and the Australian Majors, stick to borrowing and lending activities Deutsche bank is focussed on trading and investment banking. That means it is interconnected throughout global finance and it’s why the IMF said back in June that “Among the G-SIBs, Deutsche Bank appears to be the most important net contributor to systemic risks.”

• A DB spokesman says confident that vast majority of trading clients understand group has stable financial position. But The result is that in the US Wells Fargo is down 1.7%, Citibank more than 2%, Westpac ADR’s are off 1.94%, the NAB is off 1.85% in NYC trade while the CBA and ANZ ADR’s are currently down 1.20% at 5.15am.

• Speaking of contagion – traders and investors tie everything together when they get worried - after NordLB cancelled a bond issue the other night we got news that Germany's other banking giant, Commerzbank (DE:CBKG), is about to cull almost 10,000 jobs. That represents close to a fifth of its workforce. It is also suspending it’s dividend. Is it any wonder EU lawmakers are pushing back against Basel IV rules?!

• Interestingly neither bonds of the JPY/USD have benefitted to the extent one might imagine which suggests that the Deutsche Bank mess has folks alert but not yet alarmed. US 10’s are at 1.56% and USDJPY is at 101. – although it was up at 101.80 at one point.

• In other news US GDP growth for the second quarter was upgraded to 1.4% from 1.1% at the latest read released overnight. That was on the back of more business investment than had been previously reported in the data. PCE prices were up 2% but pending home sales fell 2.4% in August against expectations of a flat outcome.

Australia

• It was a cracking day on the S&P/ASX 200 yesterday with the market 1% higher closing at 5471. But as stocks came off in New York overnight so to have the SPI 200 traders marked down their expectations for the market today. At 5.30am the Dec SPI is 34 points lower for a fall of 0.6%. But depending on how Asia treats the DB story it could get worse.

• That said it’s going to be an interesting day on the ASX regardless. That’s after the divergent performance of the banks and the miners overnight. Sector rotation may be really taking off even though the miners are well off their lows. So while the banks had a shocker after DB got crushed 8% in NYC trade the miners have had a cracking night after receiving multiple upgrades from brokers and banks for price targets. BHP Billiton Ltd (AX:BHP) was up 6.47%, and Rio Tinto PLC (LON:RIO) stocks rose 4.29% in London.

• I guess the OPEC decision reinforces the fact that the commodity cycle lows we saw in early 2016 are probably the lows for the cycle. But prices for BHP (london), as an example, at 1168 this morning are more than 100% off the late January low of 571. So things are getting a little stretched. Here BHP’s London chart.

Forex

• 77 cents is still a bridge too far for the Australian dollar again in the past 24 hours. Most markets around the globe are trading incredibly technically at the moment and the AUDUSD is no different. But it’s also worth noting that this time yesterday technical were really the only solid reason to sell the Aussie but rising fears of financial contagion stemming from Deutsche bank will not help the Aussie’s cause. So it’s of 57 points, 0.69%, at 0.7634 this morning.

• Elsewhere on forex markets the NZD/USD is 0.4% lower at 0.7250, the CAD/USD couldn’t lift with crude and actually weakened half a per cent against the US dollar. That tells you something about contagion. EUR/USD is largely unchanged again around 1.1210, the GBP/USD – like its Commonwealth cousins – is down around 0.4% at 1.2969.

• It’s very, very technical in forex land at the moment so I’m watching levels closely.

• And in other news, Mexico’s central bank jacked rates up 50 points to 4.75% as it tries to stem the USD/MXN weakness. The central bank also said “with this action, the aim is to stem inflationary pressures and keep inflation expectations anchored”.

Commodities

• Even though the naysayers seem to have the loudest voices in oil after the announcement of the OPEC deal yesterday crude oil prices still managed to climb – even if they are off their highs. Crude Oil is up 1.4% to $47.70 while Brent Oil is up 0.8% to $49.08.

• As I noted yesterday Crude has to break up and through the technicals – just like any market at the moment – but I strongly believe the fiscal imperatives of the budgetary positions of much of OPEC will see them at least try to make this deal stick. And yes other suppliers will come on line if prices rise materially. But this seems like a plan to stabilise and then lift prices over the medium term back into the mid-50’s not run them up to the $70’s or $80’s.

• Like most other markets right now technical are still key. WTI couldn’t get up and through just yet.

• Gold is calm around $1321 and Copper is at $2.18

Today's key data and events (all times AEDT)

• Australia - HIA New Home Sales (MoM) (Sep) (11am); Private Sector Credit (YoY) (Jul), Private Sector Credit (MoM) (Jul) (11.30am)
• New Zealand - Building Permits s.a. (MoM) (Aug) (8.45am); ANZ Activity Outlook (Sep) (10am); ANZ Business Confidence (Aug) (11am); M3 Money Supply (YoY) (Aug) (12pm)
• China - Caixin Manufacturing PMI (Sep) (11am); Caixin China Services PMI (Sep) (11.45am)
• Japan - Tokyo CPI ex Fresh Food (YoY) (Sep), Tokyo Consumer Price Index (YoY) (Sep), Tokyo CPI ex Food, Energy (YoY) (Sep), National Consumer Price Index (YoY) (Aug), National CPI Ex-Fresh Food (YoY) (Aug), National CPI Ex Food, Energy (YoY) (Aug), Jobs/applicants ratio (Aug), Unemployment Rate (Aug), Overall Household Spending (YoY) (Aug) (9.30am); BOJ Summary of Opinions, Industrial Production (MoM) (Aug), Industrial Production (YoY) (Aug) (9.50am); Annualized Housing Starts (Aug), Housing Starts (YoY) (Aug), Construction Orders (YoY) (Aug) (3pm)
• Germany - Retail Sales (YoY) (Aug), Retail Sales (MoM) (Aug) (4pm)
• EU - Unemployment Rate (Aug), Consumer Price Index (YoY) (Sep), Consumer Price Index - Core (YoY) (Sep) (7pm)
• UK - Gfk Consumer Confidence (Sep) (9.05am); Net Lending to Individuals (MoM) (Aug), Gross Domestic Product (YoY) (Q2), Gross Domestic Product (QoQ) (Q2), Total Business Investment (YoY) (Q2), Total Business Investment (QoQ) (Q2), Index of Services (3M/3M) (Jul), Current Account (Q2) (6.30pm)
• Canada - Raw Material Price Index (Aug), Industrial Product Price (MoM) (Aug), Gross Domestic Product (MoM) (Jul) (10.30pm)
• US - Personal Spending (Aug), Core Personal Consumption Expenditure - Price Index (YoY) (Aug), Personal Consumption Expenditures - Price Index (MoM) (Aug), Personal Income (MoM) (Aug), Personal Consumption Expenditures - Price Index (YoY) (Aug), Core Personal Consumption Expenditure - Price Index (MoM) (Aug) 910.30pm); Chicago Purchasing Managers' Index (Sep) (11.45pm); Reuters/Michigan Consumer Sentiment Index (Sep) (12am); Baker Hughes US Oil Rig Count (3am)

Have a great day's trading