Deutsche Bank shares tumble as fresh banking sell-off grips Europe and US – business live

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.

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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.

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 slide as contagion fears flare up, Deutsche Bank hammered

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.

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

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

UK business activity holds up, inflationary pressures ease