Market Drivers September 30, 2016

DB woes send all EU bank lower
UK GDP beats
Nikkei -1.46% Dax -1.43%
Oil $47/bbl
Gold $1329/oz.

Europe and Asia:
AUD Private Sector Credit 0.4% vs. 0.6%
JPY BOJ Core CPI 0.4% vs. 0.6%
EUR GE Retail Sales -0.4% vs. -0.2%
GBP UK Current Account -28.7B vs. -30.5B
GBP UK GDP 0.7% vs. 0.6%

North America:
CAD GDP 8:30
USD Core PCE 8:30
USD PS/PI 8:30
USD Chicago PMI 9:45
USD Revised U of M 10:00

Concerns over the financial stability of Deutsche Bank spilled over to the whole European banking sector, dragging the DAX down by more -1.5% and sending EUR/USD towards the 1.1150 level as risk aversion sentiment flared up at the start of European trade today.

Yesterday’s report by Bloomberg that some hedge fund clients were moving their capital out of Deutsche Bank on fears of balance sheet risk reverberated through European markets today sending shares of all major banks lower. DB faces a fine of upwards of $14 Billion for US Department of Justice over the mortgage security violations and that massive penalty along with a very challenging profit environment has put enormous stress on the bank shares as investors fear that it simply does not have the capital to address all the various problems facing it.

DB has challenged the scope of the fine by the DOJ and has vowed fight the levy, but investors are not waiting for the resolution of the issue as they abandon DB both as a client and an investment. So the far the government of Angela Merkel has refused to provide any aid to the bank and officials have denied that they are working on any plans for a rescue. Still Deutsche Bank is considered to be the fourth most systemically important bank in the world and it’s highly unlikely that officials will allow it to fail given its importance not only to the European economy but to the global economy as well.

DB finds itself in an unfortunate situation of facing diminishing profit margins due to ECB zero interest rate policy while subject to massive fine from the DOJ, the resulting cash crunch could test the bank’s liquidity and send financial markets into panic. However, the DOJ has indicated that it would like to settle its case as a bundle which would include Barclays and Credit Suisse along with DB. Given the financial and political ramifications of the matter the DOJ may opt for a much more reduced terms of the fine which would lift much of the pressure off DB.

In the meantime, the uncertainty surrounding the issue is likely to roil the markets on fears that any collapse of DB would have systemic impact on the whole global financial system and the longer this matter persists the more nervous the market will become. For now the impact is generally contained with euro holding support ahead of the 1.1150 level.

In North American trade the calendar carries Personal Income/ Spending data as well as Chicago PMI numbers. The news could have modest impact on trade, but the key driver will likely be equity flows. If risk aversion picks up ahead of the weekend the selling in EUR/USD will accelerate and the pair could test the 1.1150 support before the day’s end.

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