The Lowdown on Markets to 30th September 2016
World Markets at a Glance
In this week’s issue
- Global markets respond to the news about Deutsche Bank and contagion fears.
- Clearly worries about Germany’s biggest lender were identified by the IMF back in June.
- At present the banks liquidity is not an issue but maybe dependant on the outcome.
- Whilst unhelpful, most experts believe that this is not a Lehman moment or indeed 2008.
- The price of crude oil spikes up to US$50.0 a barrel but its future path is still unclear.
- The strategic structural picture looks hazy whilst tactical positioning could be rewarding.
“Fears of a eurozone banking crisis wobbles the markets then calm returns”
Global equity markets around the world began to wobble as they started to respond to the news that we might be entering another period of anxiety over the banking sector. This dilemma was created when Germany’s biggest lender, Deutsche Bank, received a US$14 billion demand from the US Department of Justice for the mis-selling of mortgage-backed securities. The consequences of such an event was then played out against a broader backdrop of more systemic risks and worries concerning other candidates within the European and Japanese banking sector.
Regrettably, this recent announcement does follow on from the IMF’s worries about the German bank, when back in June; they put out their warning regarding Deutsche Bank’s financial position and the possible potential risks it might create to the overall financial banking landscape.
Clearly, at the time the IMF was looking for any financial threats that might occur from any financial instability that might stem from any global systemically important banks, known as G-SIB’s. In their findings the IMF said that Deutsche Bank was the biggest contributor to systemic risk followed by HSBC and Credit Suisse.
“This is not a Lehman moment or indeed 2008”
Obviously, this renewed banking threat comes at a time when the European political scene is looking far from certain, and of course, the latest news that Britain will invoke article 50 by the end of March 2017, triggering their eventual departure from the European Union, clearly creates some additional insecurity amongst the eurozone. Ironically, the German Chancellor, Angela Merkel, will also need to announce when the next German Federal Election will take place, given that the German electorate must go to the polls by no later than the autumn of 2017.
At present, the German government is denying that they will get involved, and have any plans to bail out Deutsche bank, which in itself, might create concerns that if the Bank were to become insolvent then inevitably it would trigger another financial crisis. Obviously, this would be bad news for the German Chancellor, right at the end of her tenure, particularly, on the back of her unilateral decision last year to open German borders to Syrian refugees which led to political turmoil in both Germany and across Europe.
Understandably, the markets will now watch events very carefully over the next few days and weeks to see how Deutsche Bank approach a settlement, be it the US$14 billion reported, or a much lower negotiated amount. Realistically, it is unlikely that the German government will get involved given that it would be political suicide for Angela Merkel, and so outside of a negotiated settlement, the focus might turn towards the Bundesbank, or perhaps the ECB, but then again, the ECB president, Mario Draghi, would need to choose his words and actions carefully.
“Looking outside of Europe the US banks seem much more robust”
Admittedly, the likes of the European Central Bank have been very vocal on more than one occasion, saying it would do “whatever it takes” to get financial stability within the Eurozone, but with most analysts, and investors, believing that this is not a Lehman’s moment, or indeed, 2008, their actions will probably remain subdued for the time being.
At present liquidity seems to be fine, but it will depend on the outcome of the settlement, and in the meantime whether confidence falters and clients begin to leave the bank creating a further period of panic within the market place. Equally, what must be said is that since the financial crisis in 2008, the central banks around the world have been extremely accommodative with their assistance and their ongoing monetary stimuli. Equally, most professional investors see this situation as a stark reminder of the suspicions and the doubts that still lurk within the banking sector, especially those in Europe.
On the other hand, looking outside of Europe the US banks seem much more robust, given that the US authorities acted much quicker to the crisis in 2008, and therefore, strengthening their banking system and overtime their economy. But we also know from past experience that within this sector many of the banks become entwined with each other and contagion can quickly become an issue.
Likewise, this is unlikely to instill any confidence in investors to add to their positions in Europe, in fact, since February we have seen considerable outflows of monies from European equity funds as investors switched their allegiances to other regions, given the uncertainties surrounding the health of the Eurozone’s financial sector and economy.
“The odds favour a hike before the year end”
Of Course, last week’s events in Europe will also not help the US Federal Reserve Bank in making their decision on whether to raise interest rates in December, or to hold off until 2017. At present the odds favour a hike before the year end, but this decision is likely to be determined by stronger US economic data, and the outcome of the US presidential election in November.
Obviously, other issues of contention over the coming months could be focused around the price of crude oil, given that Saudi Arabia appear to have sacrificed a considerable amount of ground at the recent OPEC meeting to accommodate the Iranian demands so as to get the deal done and over the line.
Indeed, whilst they talked about a freeze of production, it is actually a cut from the current levels, the first reduction since 2008. Therefore, it was no surprise to see the price of Brent crude oil soar by over 5 per cent in mid-week, before closing out the five day trading period at just under US$49.0 a barrel.
“We are still seeing some positivity in regions such as Asia and the emerging markets”
Now in respect to the future oil price, the conundrum now seems to be, will the price rise to US$60.0 a barrel, or over the short-term drift lower, given that producers such as the Saudi’s could ramp up production over the coming months, before the effects from cuts alleged in November take their toll.
And so once again, there seems to be further clouds of speculation mounting over financial markets and talk of a possible correction in the not too distant future, and that maybe the case, but we are still seeing some positivity in regions such as Asia and the emerging markets where countries such as Indonesia, are witnessing their strongest growth in more than three years. Vietnam also remains one of the bright spots in emerging Asia, and therefore, what seems to be happening is that tactical positioning within asset allocations is adding to returns given that the strategic structural picture seems to be rather hazy at the current time.
None-the-less, on a wider geographical perspective both global bond and equity markets have still been fairly generous over this year, whilst the fear gauge, the VIX index, have been rather subdued, and of course, for UK investors that have been over weight global bonds, and equities, they have been further rewarded through the double digit depreciation of sterling and given the current outlook for the pound this is likely to remain the case, especially if the US hikes rates further at the end of the year.
Peter Lowman Chief Investment Officer
Peter Lowman has been in investment management for over forty years and prior to becoming Chief Investment Officer for Investment Quorum, he worked within a larger asset managers, primarily as an Investment Director with Cazenove’s. He is responsible for the overall investment strategy for Investment Quorum clients and sits on the Investment Quorum Committee.
This article does not constitute specific advice and investors should bear in mind capital invested is not guaranteed. Investment Quorum is authorised and regulated by the Financial Conduct Authority .