Deutsche Bank has dominated the headlines over the past week or so with fears it would be unable to meet the $14 billion fine imposed by the US for mis-selling Mortgage Backed Securities (MBS). Investors thought it was no coincidence that such a fine exactly matched the European Commission imposed $14 billion in taxes the company needs to make due to illegal state aid from Ireland. Deutsche Bank shares are trading at a 30 year low at around EUR 12. In 2007 the shares traded at EUR 125. There have been all sorts of claims and counter claims about CEO John Cryan going to the German government for state aid and even whispers of a merger with equally troubled Commerzbank, also denied.
The German goverment is not in a position to provide ‘bail-out’ funds for one of its own banks having imposed strict rules on, in particular, Greek banks over the last few years. The Deutsche Bank situation highlights the still current difficulties of European Banks in general, unlike their US counterparts who have re-structured and re-capitalised much more since the financial crisis.
Equity markets, however, have taken the situation very much in their stride given the overall better health of the global banking industry compared to 2008.
All equity markets benefitted from the perception that major oil producing nations may be able to achieve agreement on oil production levels. Oil spiked up 6% on the news to trade close to $50 per barrel. Energy company shares boosted equity indices accordingly.
The UK equity market, the FTSE 100 particularly, was further boosted by comments from UK Prime Minister, Theresa May that the UK would start the process of leaving the EU in Spring 2017. GBP slid to a 30-year low against the US dollar at 1.2850. A weak pound is good for the FTSE 100 in particular as it is dominated by large international companies who need to repatriate their overseas earnings back into Sterling i.e. a lower Pound means bigger profits, hence the share rally. The FTSE 100 index rose above the 7000-point level for the first time since May 2015.
Fixed Income: No major developments in the bond markets over the last fortnight. Over USD 10 trillion of government bonds (mainly European) trade with a negative yield-to-maturity. Much riskier Emerging Market bonds that were yielding 8% or 9% in January now yield 4% or 5% depending on which borrower it is and length of the maturity of the bond as investors search for yield globally.
Equities
S&P 500: 2170
Nasdaq: 5290
FTSE 100: 7100
Bonds – 10 Year Government Yields
US 1.60%
EU -0.10%
GB 0.72%
Foreign Exchange
EUR/USD 1.1250 (1 euro buys 1.1250 dollars)
GBP/USD 1.2850 (1 pound buys 1.2850 dollars)
Commodities
OIL: Brent: 48.00 (dollars per barrel)
GOLD: 1330 (dollars per ounce)
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Paul McCormick
