Deutsche Bank shares tumble as fresh banking sell-off grips Europe and US – as it happened

US stock markets just closed slightly up after another tumultuous week for the market. US stocks seemed to shake off hits to shares of Deutsche Bank, which were down over 8% by the end of the day and sparked concern over banking fear contagion. Still US stocks closed higher on Friday, with Dow up 0.41%, S&P 0.5% and Nasdaq 0.3%.

Coming up next week, top federal bank officials will be testifying in two back-to-back hearings in front of the Senate and House, on Tuesday and Wednesday respectively, as lawmakers dig into what happened with the collapse of Silicon Valley Bank.

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A group of Citibank analysts said that the fall of Deutsche Bank shares today was “irrational”.

“We view this as an irrational market,” the note said. “The risk is if there is a knock-on impact from various media headlines on depositors psychologically, regardless of whether the reasoning behind this was correct or not.”

The statement hits at the nature of panic in the banking industry – a lot of it bred on feelings of fear over substantive reasoning. This is why officials, including German chancellor Olaf Scholz, spent much of today trying to maintain trust in the banking system.

“Deutsche Bank has fundamentally modernized and reorganized its business model,” Scholz said. “It is a very profitable bank, and there is no reason for concern.”

Next week, Congress is set to hold back-to-back hearings in both chambers where federal officials will testify on the collapse of Silicon Valley Bank (SVB). Expected to testify are Federal Deposit Insurance Corporation (FDIC) head Martin Gruenberg, along with officials from the Federal Reserve and Treasury.

What likely will be a major talking point in the closely watched hearings are reassurances from officials that the US will keep bank deposits safe as the banking industry tries to stay on its feet after SVB’s collapse. Treasury secretary Janet Yellen told the House earlier this week that the treasury “have used important tools to act quickly to prevent contagion”.

“These are tools we could use again for an institution of any size if we judged its failure would pose a systemic risk,” she said.

At the close of European markets, Deutsche Bank recovered some of their losses, closing at 8.6% on Friday afternoon. At one point during the day, the bank was down 14%.

The bank has lot about a fifth of its market value this month. Other European banks were also down at closing, including Deutsche Bank German rival Commerzbank, which was down 9%. Credit Suisse and its new parent company, Barclays and Societe Generale were all down y over 6% on Friday.

EU leaders, including German chancellor Olaf Scholz and European Central Bank president Christine Lagarde, on Friday all voiced assurances in the stability of the banking system.

“Generally, I think we are in good shape,” said Dutch prime minister Mark Rutte

We’re a few hours away from the closing of the US stock market after another tumultuous day for investors. By midday, the US indexes had been trending slightly downward, with the S&P 500, Dow Jones and Nasdaq exchanges all down between 0.3% and 0.6%, according to the Wall Street Journal. Banks, expectedly, saw the biggest drops: JPMorgan is down 2.3%, Citigroup by 2.4% and Morgan Stanley by 3.4%.

Deutsche Bank saw shares listed in the US fall 5%. First Republic Bank, which has lost 90% of its market value this past month, continued to fall another 1.6%.

The market is predicting that the Fed will ultimately lower interest rates this year, even while Fed officials say they are probably not done with rate hikes given the current level of inflation.

Treasury yields – which signal what the market thinks interest rates will become – fell over 1% this month from just over 5% to around 3.75%, where it currently stands.

This is a mismatch from Fed officials, who on average predict that interest rates will be at 5.1% at the end of the year. Rates currently stand at 4.75% and 5% after a quarter-point hike on Wednesday.

When announcing the rate hike on Wednesday, Fed chair Jerome Powell said that officials are concerned about the stickiness of inflation, especially after economic data at the beginning of the year showed consumer spending and the labor market were still growing.

“inflation remains too high and the labor market continues to be very tight. My colleagues and I understand the hardship that high inflation is causing and we remain strongly committed to bringing inflation back down. To our 2% goal,” Powell said on Wednesday.

Of course the market has been focused on the impact of the banking crisis, and likely expects that the Fed will ultimately be loosening up rates in response to it. On the other hand, Fed officials say instability in the markets could ease up in the next few weeks of months, with inflation remaining high by the end of the year, necessitating higher interest rates.

The US Treasury secretary Janet Yellen called today for an unscheduled meeting of the Financial Stability Oversight Council (FSOC), which would gather top economic officials including the head of the Federal Reserve and chair of the Federal Deposit Insurance Corporation (FDIC). The meeting is closed to the public.

Yellen last called a council meeting March 12 after the collapse of Silicon Valley Bank (SVB). After the meeting, the treasury department and the Federal Reserve announced a new facility that secured the deposits of SVB and Signature Bank, which also fell that weekend.

It is unclear why Yellen called the meeting today or if the council will release a statement after.

James Bullard, president of the Federal Reserve Bank in St. Louis, told reporters today that he expects interest rates to be around 5.625% by the end of the year, showing Fed officials’ belief that even with the banking crisis causing turmoil in global markets, inflation in the US will still remain.

“Continued appropriate macroprudential policy can contain financial stress,” Bullard said, referring to the measures the Fed has taken to ease the banking crisis. “While appropriate monetary policy can continue to put downward pressure on inflation.”

Bullard said there is an 80% chance that the financial stress seen in the banking sector will ease in coming weeks and months.

The Fed on Wednesday increased interest rates by a quarter-point, bringing rates up to 4.75% to 5%. Economic projections released on Wednesday also showed that Fed officials, when averaged, believe interest rates will reach 5.1% by the end of the year.

Hello, this is Lauren Aratani in New York taking over for Julia Kollewe.

Research firm Autonomous, a subsidiary of AllianceBernstein, said in a report today that Deutsche Bank is in “robust shape” and that it is not the next Credit Suisse, despite the bank’s stock tumbling today.

Autonomous said the German bank has “robust capital and liquidity positions”. Unlike Credit Suisse, which had seen years of problems before its fall, Deutsche Bank has had 10 consecutive quarters of profit and is in a much stronger position than Credit Suisse when the Swiss bank was targeted by market panic.

“We have no concerns about Deutsche’s viability or asset marks,” the report said. “To be crystal clear – Duetsche is NOT the next Credit Suisse.”

Europe has taken the right steps on banking regulation, according to German chancellor Olaf Scholz. He said in a press conference today:

For many years now, we have taken very correct decisions with regard to the stability of our banks in Europe — by the way, faster and clearer than in many other countries of the world. The European Union and the euro zone are quite ahead when it comes to having clear rules.

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The prime minister of Estonia, Katja Kallas, who also attended the meeting of EU leaders in Brussels, tweeted:

On Wall Street, US banking stocks are also falling, with JPMorgan down 2.2% and Bank of America slipping 1.6% while Morgan Stanley tumbled 4%.

Regional lenders were also in the red, with First Republic Bank, PacWest Bancorp, Western Alliance Bancorp and Trust Financial Corp falling between 1% and 2%.

Banking stocks are sliding again today, with Germany’s biggest lender Deutsche Bank hardest hit, as fears of contagion flared up following the collapse of three US banks and UBS’s rescue of Credit Suisse in recent weeks.

The cost of insuring against bank defaults surged, while the pound and the euro fell against the dollar and bond yields sank (they move in inverse relation to prices) as investors sought refuge in safe-haven investments, such as the dollar and government bonds.

The Euro Stoxx banks index is down 4.6% and the UK’s banks index lost 3.7%. Barclays is the biggest faller on the FTSE 100 in London, down 5.4%, after HSBC cut its price target on the stock.

Nordea chief analyst Jan von Gerich told Reuters:

Underlying sentiment is still cautious and in this environment no one wants to go into the weekend risk-on.

It’s very volatile and it’s too early to say things will calm down.

Deutsche Bank shares fell for a third day by as much as 15% and are currently trading 10% lower, after a sharp jump in the cost of insuring its bonds against the risk of default to a four-year high.

Paul van der Westhuizen, senior strategist at Rabobank, said while the German giant has had its problems, there are fundamental differences between Deutsche and Credit Suisse:

Deutsche is a bank that has had its own issues with regulators, it has also seen profit volatility and gone through a restructuring.

There is a fundamental different in that Deutsche has returned to profitability over the last few quarters, whereas Credit Suisse did not have a profitable outlook for 2023 at all.

The sell-off came at the end of a turbulent week, and despite attempts by German chancellor Olaf Scholz, French president Emmanuel Macron and European Central Bank president Christine Lagarde to assure investors and the public that the banking system is stable.

Lagarde told EU leaders, according to Reuters, which spoke to EU officials who attended the meeting:

The euro area banking sector is resilient because they it has strong capital and liquidity positions.

The euro area banking sector is strong because we have applied the regulatory reforms agreed internationally after the global financial crisis to all of them.

The ECB is fully equipped to provide liquidity to the euro area financial system if needed.

Susannah Streeter, head of money and markets at Hargreaves Lansdown, said:

Just as hopes had risen that contagion would be contained, banking stocks in Europe have been battered again by fears that fresh problems could be lurking. More worries about the fragilities in the US banking sector emerged after US Treasury Secretary Janet Yellen said she was prepared to take more action to ensure deposits were safe.

Revelations that white knight UBS, which had ridden to the rescue of Credit Suisse, is being investigated by the US Department of Justice has shaken sentiment further. The probe centres around allegations that staff helped Russian oligarchs evade sanctions.

Concerns are also deepening around Deutsche Bank after the cost of insuring against defaults on its debt spiked, with credit default swap prices soaring. Worries about contagion are again rearing up even though more deposits appear to have been flowing into the German lender since the banking scare erupted, and it is thought to have capital reserves well in excess of regulatory requirements. These fresh problems are bubbling up in a cauldron of worry about the implications of the rate rises we’ve seen over the past week, given that earlier hikes appear to have caused breakages in parts of the banking system. There are worries that the fresh round of rate rises could make a precarious situation worse for some smaller banks, particularly those sitting on large bond holdings which have lost value as monetary conditions have been dramatically tightened.

Waves of bad news keep hitting the banking sector and the tide doesn’t look like it’s set to turn any time soon. However, the European Central Bank has made it clear that it is standing by ready to deploy fresh tools to boost liquidity should the situation deteriorate and president, Christine Lagarde, has again reassured EU leaders in Brussels that the banking sector remains resilient with strong capital positions. The message from the Bank of England has been on repeat over the past fortnight. Although it’s monitoring the situation it’s stressing that there is still no systemic risk and that the UK banking system remains safe and sound.

Naeem Aslam, chief investment officer at Zaye Capital Markets, has sent us his thoughts on Deutsche Bank.

As of now, Deutsche Bank’s stock price has dropped by more than 13%. Concerns about the soundness of the European financial system have returned to the minds of traders. This week, European banking shares had a little respite thanks to UBS’s forced purchase of Credit Suisse, but that reprieve has quickly evaporated as the prospect of a new crisis has emerged.

Deutsche Bank has made the unexpected statement that it would redeem its tier 2 subordinated bonds in an effort to reassure its depositors. Nevertheless, a major sell-off in Deutsche shares occurred when problems with the yield on its AT1 bonds (a hugely popular asset class this week after Credit Suisse’s AT1 were marked down as part of the rescue plan) emerged.

The credit default swap index for banks jumped to a terrifying 173 points today. The CDS of this and other European banks are rising, which is an intriguing development. There hasn’t been a single event or development that can be pinpointed as the cause of the significant shifts in the DB’s CDS, but if this bank fails, Credit Suisse’s failure size will very much look like SVB’s collapse. This is because DB is too big to fail, and if this goes to a bailout situation, it will pave the way for many more in the very near future.

Is another financial collapse imminent?

The current level of credit default swaps for European banks is just a little lower than it was during the height of the European financial crisis in 2013. The current level is above the CDS reached back in the 2008 financial crisis. If these CDS do not normalise, it is highly likely stock market may continue to suffer for many days as a result of this.

In the US, durable goods orders unexpectedly fell by 1% in February from the month before, indicating that investment in business equipment was weakening even before the banking turmoil started.

Andrew Hunter, deputy chief US economist at Capital Economics, said:

With business confidence likely to have taken a hit in recent weeks and banks tightening lending standards further, we suspect business investment has further to fall.

The headline weakness was partly the result of aircraft, with Boeing booking only two orders last month resulting in a 6.6% m/m fall in the value of commercial aircraft orders. Those orders should see a big rebound soon, however, once the bumper order recently announced by Air India is finalised. Motor vehicle orders fell by 0.9%, while orders were also dragged down by an 11.1% drop in defence aircraft…

While the extent of the drag from events over the past couple of weeks remains to be seen, it would be a surprise if it didn’t deal a further blow to investment, particularly for small firms more reliant on bank financing. The regional manufacturing surveys, which had already been pointing to declines in capital goods orders, have so far supported that idea – with the capex intentions component of the March Philly Fed index in particular falling to its weakest since 2009. The upshot is that we expect the weakness in equipment investment to intensify from here, which is likely to help drag the wider economy into recession soon.

Is Deutsche Bank the next ‘sick bank of Europe’?

Holger Zschäpitz, economics editor of the German newspaper Die Welt, has tweeted:

UK business activity held up in March, led by the service sector, while firms’ costs fell to a two-year low.

The flash reading from the S&P Global/CIPS monthly survey showed a drop in the main index to 52.2 from 53.1 in February, but indicated further expansion as it remained above the 50 no change mark. The services business activity index weakened slightly to 52.8 from 53.5 while the manufacturing sector dipped into negative territory, with the index falling to 49 from 50.9.

The survey pointed to a sustained increase in UK private sector output, largely reflecting a strong performance by the service sector. New business received by service sector firms rose at the sharpest pace for 12 months, although staff shortages acted as a drag on growth.

Manufacturing production dipped in March and was once again held back by subdued order books.

Input price inflation eased to a two-year low in March, mostly reflecting a considerable softening of cost pressures in the manufacturing sector. Many firms noted that lower commodity prices and falling freight rates had been passed on by suppliers.

Manufacturers continued to report improving supply conditions, with delivery times shortening the most since April 2009.