Market Commentary | Deutsche Bank Steals the Headlines

Deutsche Bank has been recently making the headlines for all the wrong reasons. A few weeks after a turnaround plan by new incoming CEO John Cryan seemed to be yielding results, the US Justice Department slapped Germany’s largest lender with a fine of $14 billion (which the bank says it has no intention of paying in full) for alleged fraudulent selling of complex mortgage-backed securities (MBS) at the height of the financial crisis of 2008.

The news would be bad enough under normal circumstances, but in an environment which – in Europe – does not seem to point to substantial growth, the reverberations were even greater. Additionally, if one considers the fact that Deutsche Bank set aside just over $6 billion for legal claims, it is not unreasonable that the bank may have to raise additional capital just to pay the fine. If that happens, other European credit institutions such as Credit Suisse, Royal Bank of Scotland and Barclays may also face larger-than-expected fines related to MBS sales.

In the past weeks, rumours were swirling around of a merger with Commerzbank AG (Germany’s second-biggest lender), and unnamed sources have quoted German Chancellor Angela Merkel saying the German government ruled out any state aid to Deutsche Bank due to the upcoming election. Official government spokesmen denied the remarks later during the day, but what is true is that Deutsche Bank’s woes are weighing heavily on market sentiment.

Back in June, the International Monetary Fund said the German bank – Europe’s fourth-largest by assets – may be the biggest contributor to systemic risk among the world’s largest financial companies. Investors seem to have picked up once again on the risks of owning Deutsche Bank at the current juncture – shares were down 7.5% to a new record low of €10.55 and its hybrid contingent-convertible (CoCo) bond fell to 73 cents to the Euro.

Markets were not very happy about the developments, and heavy losses by financials dragged down all major European bourses. Unsurprisingly, the DAX got the worst of it, falling by almost 2.2%. Yields on US and German 10-year benchmark papers fell more than 3 basis points, matching levels seen earlier this month. US markets were also nursing heavy losses, as the first presidential debate kept most investors on the sidelines.

One asset which did rally heavily was crude oil. In true yo-yo fashion, Saudi Arabia once again fanned the flames of a possible freeze or cut in output, after it had poured cold water over such a possibility on Friday. There is no official statement as yet, but expect some form of communication this week as OPEC and Russia are meeting in Algiers.

Sanofi Gets a Boost

Industry giant Sanofi also made yesterday’s headlines albeit for a different reason. The French drugmaker released a statement saying it had been awarded $43 million in funding to accelerate the development of a Zika vaccine. An additional $130 million can be awarded for late-stage trials prior to approval if the initial feedback is positive.

The contract, which runs till June 2022, was awarded to Sanofi by the – hold your breath – US Department of Health and Human Services’ Biomedical Advanced Research and Development Authority. Shares were unable to rally and ended the day down by 1.26% at €67.59, but this is probably because of the negative overall sentiment in the market.

This article was issued by Andrew Martinelli, Trader at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, views and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri Investment Services Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.