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Categorized | Financial

Deutsche Bank concerns weigh on US market

Posted on September 29, 2016

FRANKFURT AM MAIN, GERMANY - SEPTEMBER 26: The headquarters of Deutsche Bank stand on September 26, 2016 in Frankfurt, Germany. Shares of Deutsche Bank dropped by over 6% today and fell to their lowest level since the 1980s following reports that the German government will not step in to shore up the bank. U.S. regulatory authorities are seeking a USD 14 billion fine from Deutsche Bank due to its role in contributing to the U.S. sub-prime mortgage crisis of 2007-2008. (Photo by Hannelore Foerster/Getty Images)©Getty

    The US stock market took a tumble on Thursday as mounting concerns over the financial health of Deutsche Bank unnerved investors and ramped up demand for US Treasuries.

    Deutsche Bank has been under pressure for most of the year, most recently over concerns of a $14bn potential settlement with the US Department of Justice. Its shares had steadied recently after the bank agreed to sell its Abbey Life insurance arm for $1.2bn, and chief executive John Cryan had ruled out a share sale.

    But on Thursday the pressure ramped up again, after Bloomberg reported that some hedge funds have pared parts of their business with the German lender, reigniting market jitters.

    A person briefed on the situation at Deutsche Bank told the Financial Times that some hedge fund clients had imposed risk limits on the business they do with the German bank in response to the negative headlines and the recent rise in its credit default swap prices, a widely-watched indicator of credit risk.

    The bank’s US-listed shares fell as much as 9.1 per cent on Thursday, and ended the day down 6.7 per cent, giving Deutsche Bank a market capitalisation of just $15.8bn, compared to its total assets of €1.8tn.

    Given Deutsche Bank’s heft and global links, its woes helped send US financial stocks down as much as 1.9 per cent, and the S&P 500 index closed down 0.9 per cent, its biggest one-day fall in more than two weeks.

    Hedge funds pull business from Deutsche Bank

    Dark clouds hovering over Deutsche Bank towers...epa05001594 (FILE) A file photo dated 20 May 2015 showing dark clouds hovering over the headquarters of German banking and financial services corporation Deutsche Bank in Frankfurt, Germany. Deutsche Bank, Germany's largest bank, said 29 October 2015 that it will cut about 9,000 jobs, four days after it announced a restructuring. The reorganization of the bank's leadership was announced Sunday by chief executive John Cryan, who said the aim was 'to create a bank that's better-controlled, more cost-efficient and more strongly focused.' The bank has been dogged by a host of problems in recent months, ranging from shake-ups in management to major anticipated losses. It also was fined 2.5 billion dollars in April for its role in manipulating the benchmark Libor interest rate, which banks charge one another for loans. Deutsche Bank is also preparing to sell its Postbank subsidiary, which will mean a loss of a further 15,000 positions. EPA/ARNE DEDERT

    Pressure on German bank weighs on its shares and the wider US market

    Demand for safer assets pushed the 10-year Treasury yield down from 1.6 per cent to a low of 1.54 per cent, before rebounding to 1.55 per cent once the initial jitters subsided.

    Bloomberg reported that 10 hedge funds, including Millennium Partners, Capula Investment Management and Rokos Capital Management, had moved part of their derivatives-clearing business elsewhere, citing an internal Deutsche Bank document.

    In response the bank recirculated a statement that said: “Our trading clients are amongst the world’s most sophisticated investors. We are confident that the vast majority of them have a full understanding of our stable financial position, the current macroeconomic environment, the litigation process in the US and the progress we are making with our strategy.”

    Short-sellers increase the pressure on Deutsche Bank’s shares

    A statue is seen next to the logo of Germany's Deutsche Bank in Frankfurt...A statue is seen next to the logo of Germany's Deutsche Bank in Frankfurt, Germany, January 26, 2016. REUTERS/Kai Pfaffenbach/File Photo

    Credit default swaps also reacting sharply to trials of German bank

    The person close to Deutsche Bank said the reining in of risk by hedge funds had affected the sales and trading operations of its global markets division. But it had not seen similar moves by clients in its transaction banking division, which provides cash management and global custody services to large investors and corporate clients, or at its corporate finance division, which provides advice and financing to companies for M&A deals.

    But some hedge funds have been ratcheting up their bets against Deutsche Bank’s shares, which have lost more than half their value this year, and others said they were monitoring Deutsche Bank’s situation closely.

    “They are pulling exposures,” said a hedge fund trader, who does not clear with the German lender. Some funds were “pulling excess collateral, pulling cash and reassigning trades so they don’t face Deutsche but they face other counterparties”.