Market Talk – September 29, 2016

Market-Talk (1)__1454353396_72.94.249.194

What was initially a healthy start to the day following a strong Asian session all that changed mid-afternoon when reports about Deutsche Bank hit screens yet again. So, rather than me recapping the whole day lets just concentrate on the final few hours where all the excitement accorded. The rumours hit the trading floors that a few large hedge funds had withdrawn excess cash together with reducing trading positions at Deutsche Bank. Normally a sign associated with quality concerns and that type of news spreads faster than you can imagine. The result was instant, DB shares hit all time low (10.1) but also had global repercussions. The DOW turned from a small daily gain to a 1% decline, core bond markets bounced and the USD accelerated gains whilst Asian stocks fell around 1% from their earlier cash close.

As yet we have not heard anything from government officials in response but this could be an interesting twenty-four hours. So, from a dealing position the first is to assess what risk you currently run with DB. This may take anything from a few hours to a few days. After that, you have to decide what should be the plan of action, here is when things get interesting! Some may take the decision to weather it out as their exposure is too large or interconnected and you hope Angela Merkle has a rethink. Others may not really know what to do because DB is so large coupled with cross-holdings exposure. This is when people sell what they can and not what they should. It takes time to assess the risks because they are now in the public eye so many will act at the same time.

What we have seen is a 1% fall in global stock indices, a move into the USD and safe-haven bid for Treasuries. Note that the US/Bund 10yr spread closed at +167.5bp (4.5bp tighter). Peripheral spreads will be volatile tomorrow especially having seen BTP’s suffering recently ahead of the vote.

Friday is never an easy day to trade so we expect more volatility ahead of the weekend. Treasuries closed well bid with 2’s the best performer closing 2.5bp lower yield at 0.735%. US 10’s fell 1bp to close 1.56% (-1bp). German Bund closed -0.115% (+3.5bp), Italy 10’s closed 1.21% (+3bp), Greece 8.10% (u/c), Turkey 9.43% (+7bp), Portugal 3.29% (-2bp) and UK Gilts 0.72% (+4bp).

EU Inflation tomorrow (0.2% expected), UK GDP (0.6% q/q) and Housing and in the US PMI and Mich Sentiment Index. Lots to drive the market but all eyes will be fixed on Deutsche Bank shares and any government response. End of month and quarter tomorrow so keep an eye out for Private Blog updates.