From Dan Denning – Capital & Conflict (Great Britain) –
Dear oh dear Deutsche Bank! How low can you go. We begin the week wondering if Germany’s largest lender has hit rock bottom. Or is it still in free fall? Is the source of the next financial crisis somewhere in far off China? Or is it the enemy within, right in the heart of the most systemically important bank in the European Union’s indispensable member?
Deutsche Bank’s shares fell as much as 6.5% in early trading this morning. They hit a 24-year low of €10.69. That takes the share price all the way back to the post-unification lows in 1992. What do you make of that?
The catalyst for the latest low was a report in Germany’s Focus magazine over the weekend. German chancellor Angela Merkel has ruled out a bailout for the bank, according to the magazine. The bank is on its own when it comes to settling the potential $14 billion fine against it from the US Justice Department.
The Feds won’t get that much. But you have to admire their chutzpah. And analysts are busy crunching how quickly the bank’s equity capital would vanish under different scenarios. If you were an investor, you might be tempted to head for the exits. If you’re a trader, you might be tempted to have a punt.
If you’re a mainstream politician hanging on for dear life, you just wish it would all go away. As for Merkel, you can blame Donald Trump for her position. Why not? He gets blamed for everything else. Merkel faces a tough election this time next year. And the results from regional elections in Berlin over the weekend won’t have helped. Why?
Merkel’s Christian Democrats fell to their worst-ever showing in the election, with just 17.5% of the vote in Berlin. The centre-left Social Democrats polled at 21.6%. Die Linke, a far-left party, and the Greens came in third and fourth, with 15.7% and 15.1% of the vote respectively. In fifth place was the Alternative for Germany party at 14%.
That last result was both a relief and a concern to the establishment. Berlin is a cosmopolitan, progressive, modern city. The rise of what’s described as a far-right party in the heart of Germany’s political establishment means that voter discontent with Merkel’s open-door immigration policy could run wider and deeper than expected.
This is not that different to the Trump/Corbyn/Brexit phenomena. Political insiders in the West find themselves on the back foot. They’ve misread the mood of the public. Or they’re simply surprised that the organs of establishment political thought (the mainstream media) are no longer listened to and obeyed by the public.
Where the politics and finance intersect is in the public mood towards the banking sector. The far-left and the far-right seem to be in agreement on at least one issue: the coddling of the financial industry by the political elites is not popular and must end. This is why the subject of this year’s MoneyWeek Conference – When Banking Dies – is so timely.
A bailout of Deutsche may not happen under Merkel. But a renationalisation of the bank, after carving it up and selling off the pieces? That might be the path of least resistance if the bank can’t convince the public the worst is over.
Maestro no more
Bond maven Bill Gross and former Fed chairman Alan Greenspan find themselves on the opposite end of a bond trade. Gross reckons the Bank of Japan’s targeting of yield on ten-year Japanese government bonds – and central bank largesse in general – gives traders a free ride on lower bond yields and higher prices. That’s the easy view.
Greenspan – in an interview few people seem to have read and even fewer have taken seriously – thinks ten-year US bond yields could rise to 5%. That would result in huge capital losses for traders and investors – given the ten-year yield closed Friday at 1.62%. What’s got Mr “Irrational Exuberance” so worried?
Greenspan told Bloomberg Television that “Whenever you have a bull market, it looks as though it is never going to turn… This is a classic case of a peak in a speculative security.” Ye gads! Did the former Fed chairman just call the ten-year US Treasury note a speculative security?
For the record, US ten-year yields hit a low of 1.37% in early July. They’re at 1.60% now. If the economic data in the US supported rising inflation forecasts, you’d expect ten-year yields to rise (and bond prices to fall). But what else could pop the bubble Greenspan thinks he sees? How about Trump?
The great debate
You can sense the glee and terror from the media today. I’m talking about the anticipation of tonight’s first presidential debate between Donald Trump and Hillary Clinton. Up to 100 million people are expected to watch.
The glee, from the media point of view, is the ratings and ad sales. What an audience! Trump has been great for the media. He’s been a constant source of tabloid and headline material. But now a bit of worry has set in.
What if the attention they’ve lavished upon him backfires? What if he can’t be ridiculed and dismissed the way other candidates are when they fall afoul of the media’s progressive sensibilities? What if he can actually win?
The media begin to sense that a Trump victory is possible. A spectacular blunder or mistake tonight would please them greatly. It would change the tenor of the race and allow the “coronation” narrative to begin. “Clinton is inevitable. It’s all over but the shouting.”
That’s probably still the safe bet. You should never count out Bill and Hillary Clinton. I’ve been watching them on the national stage for two and half decades. The Clintons are to American politics what reptiles are to the animal kingdom – a species perfectly adapted to its surroundings that is skilled at survival and predation. It will take something unusual to change that.