Deja Vu in Capital Markets

Friday September 30: Five things the markets are talking about

Despite having already seen the script, investors seem unwilling to improvise, but prefer to act out what’s gone before.

This week is closing out with markets shifting their focus from rallying energy on an OPEC output cut, to financials as Germany’s Deutsche Bank bears the brunt of liquidity concerns.

Investors’ growing fears that Germany’s largest bank could become the next Lehman brothers are supporting risk aversion strategies across the various asset classes (gold, CHF and sovereign bonds).

If the market happens to be forced into a crisis because of the German bank’s woes it would make a complete travesty of the last nine-years efforts by both regulators and governments.

1. Global indices see red

Global bourses have extended their losses on Friday as worries about the health of Deutsche Bank weighed on financial stocks and as oil prices retreat from this months highs on doubts over OPEC’s new plan to curb output in November.

Overnight, the MSCI Asia Pacific Index dropped -1%, with financial stocks accounting for almost a third of the decline.

In early Euro trade, the Stoxx Europe 600 Index has slid -1.5%, paring its Q3’s advance to +2.4%. Deutsche Bank shares have tumbled -8.1%.

U.S futures are to set open down -0.2%+ ahead of further Fed rhetoric (Dallas President Kaplan) and U.S consuming spending data.

Indices: Stoxx50 -1.3% at 2949, FTSE -1% at 6,849, DAX -1.2% at 10,10284, CAC-40 -1.3% at 4,382, IBEX-35 -1.9% at 8,628, FTSE MIB -1.1% at 16,157, SMI -1.4% at 8,051, S&P 500 Futures -0.2%

2. Crude oil traders taking some profit

Black “gold” is trading lower as speculators cash in on this week’s surprise OPEC announcement, details yet to be confirmed, to reduce output for the first time in eight-years.

Brent crude is trading down -75c at $48.49 a barrel, while WTI is down -69c at $47.14 a barrel – both are around +5% higher than before the OPEC announcement on Wednesday.

Investors should be expecting a fair bit of oil price volatility at least until OPEC’s November meeting in Vienna when the details, including the quotas and the implementation data, will become public.

Despite a stronger dollar capping its gains, gold is trading higher ahead of the open stateside (+0.3% to $1,323.70 an ounce). The yellow metal remains on track to close out the week in the red if it does not find further support from falling stock prices (-1% w/w).

3. Risk aversion flattens sovereign yield curves

If in doubt buy sovereign bonds so goes the saying and that is what the global investor is currently doing.

U.S. 10-year yields have declined another -2bps points overnight to +1.54% on Deutsche bank woes. In Australasia, Aussie and Kiwi sovereign debt are trading at new three-week low yields, while German bunds fall -3bps to -0.15%.

Fixed income dealers are expecting some further whip lash price action today from month-end and quarter-end demand to balance portfolios.

Expect this asset class to be susceptible to some big price swings in Q4 due to the uncertainty in the U.S Presidential election and the Fed’s interest rate decision.

4. Dollar gains on Deutsche woes

It’s natural to see the “big” dollar find some support across the board ahead of the U.S open on Euro financial fears. Nonetheless, both month-end and quarter-end demand may distort some of today’s price action.

The EUR has fallen sharply against CHF, hitting a two-month low around €1.0812 as investors seek European-based safe haven alternatives to the single currency. Outright, the single unit is down -0.3% (€1.1176).

Better than expected U.K GDP data (see below) has not been able to push the pound through its psychological £1.3000 handle in early trade. Hard Brexit landing fears continues to encourage sterling selling on any rallies.

5. What Brexit fears?

U.K data released earlier this morning indicated that their economy grew faster in Q2 than initially perceived, supported again by its dominated services sector.

The final estimate of Q2 growth grew at an annualized rate of +2.7%, up from its earlier estimate of +2.4%. The revision came from stronger growth in the services sector and higher business investment.

The BoE expects U.K’s growth to slow on the uncertainty of U.K future ties with the E.U and reason why Governor Carney has telegraphed the possibility of another BoE rate cut by year-end.

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