Here are the key questions for markets and investors this week.
More share price volatility for Deutsche Bank and eurozone financials?
The start of the fourth quarter comes as equity markets have swung back and forth as investors seek clarity over the state of European financials, notably Deutsche Bank.
The German lender’s share price slumped to a multi-decade low with hedge fund clients pulling out their money last week, before a robust rebound late on Friday. Investors anticipate a settlement with the US Department of Justice over mis-selling mortgage-backed securities before the financial crisis that may be a lot less than $14bn.
As we await the air to clear over Deutsche Bank, more broadly, the European financials sector remains deep in a funk thanks to a monetary policy regime of negative overnight interest rates and lacklustre economic activity. While the Euro Stoxx banks index rose for the third quarter, it fell 1.8 per cent last month and is down a stunning 30 per cent for the year.
For investors looking at whether the sector is a long-term buying opportunity, the words of Credit Suisse’s chief executive bear careful consideration. Tidjane Thiam warned last week that European banks were in a “very fragile situation” and were “not really investable as a sector”.
How long are markets back to a risk-off trading environment?
For about a day, but not much more. Reasons can always be found to make markets risk-averse — Deutsche Bank, Trump — but investors’ propensity is to make the most of the low-volatility environment and grab whatever high-yield opportunities take their fancy, particularly in emerging markets.
“It doesn’t feel like the market is ready to have a trend in anything at the moment,” says Paul Lambert, head of currency at Insight Investment. “As soon as you think there is a risk of rising volatility, central banks turn on the taps again. There is no fundamentally good story in the background.”
This state of affairs will doubtless be poured over by the IMF and the World Bank at its annual meeting. Markets will expect to hear recommendations for co-ordinated fiscal stimulus packages from around the world, but no one will want to disturb benign market conditions, so risk appetite looks set to continue.
Will US jobs reshape US policy expectations?
Markets last week largely switched off from Federal Reserve watching, turning their gaze to the US presidential debate and the prospects of an unlikely Trump victory. The polls are swinging back into Hillary Clinton’s favour, so that should give space for Friday’s non-farm payrolls data to take centre stage.
Investors’ focus is on the barriers preventing a December rate rise — the election is one, and another bad set of data another. As summer absentees return to the jobs market and jobless claims decline, Brown Brothers Harriman expects strong September data.
Fed commentary suggests the bar to a December rate rise is low, says BBH, so “the data does not have to improve much for the Fed to act”. One key hurdle may well have been overcome by the end of the week.
How much longer will the euro hold its nerve?
The shared currency has bounced back in a sustained fashion from the midsummer shock of the UK’s Brexit vote. But euro bulls are looking at a growing list of risk factors, including fresh concern about conditions in the financial sector and stubborn worries about lacklustre growth. Deutsche Bank worries weighed on the euro at the end of last week.
There are minutes from the European Central Bank’s September meeting due on Thursday, after eurozone inflation data the day before — could this be the week to test the nerves of the euro bulls? Throw in the prospect of US non-farm payrolls data at the back end of the week driving dollar strength, and the ingredients for a weaker euro are in place.
The flipside comes from Kit Juckes at Société Générale. He worries about the ECB shifting policy to help southern European economies and a slowing pace in outflows of capital from Europe. “ . . . the longer the euro refrains from depreciating, the greater the risk of a damaging spike higher”, he says. In other words, just as the yen strengthened in response to Bank of Japan limitations, so ECB shortcomings may push the euro higher.