Highlights:
- US: interest rates on hold, presidential election looming
- Deutsche Bank in trouble
Changes in selected stock indices and commodities:
Note: USA: S&P 500, Europe: BE 500 inx, Japan: Nikkei 225, Brazil: Ibovespa, Russia: RTS, India: NIFTY, China: Shanghai Composite, Africa+Middle East: GCC 200, South Africa: JSE TOP 40, Australia: ASX 300, Gold and Oil
Commentary:
US and European markets virtually held their own in September, unlike Japan and China whose markets posted losses. The Japanese economy has been struggling for three decades and growth has been very weak. This is partly due to the ageing of the Japanese population (average age 46 years!), high corporate taxes and, despite the weakening over the last five years, the Japanese currency is still too strong. This is a lethal cocktail for an export economy. China, in turn, is facing structural changes in the longer term, with the formerly heavily manufacturing-exporting country becoming a more advanced economy with higher domestic consumption and endowed with capital. This entails wage growth, social change and not least a saturation of demand (e.g. an overheated property market). The main exchange rate driver in September was again the central banks, which have so far mostly postponed interest rate hikes despite improving economic indicators. The Japanese BoJ, the European ECB and, most importantly, the US Fed did not raise interest rates in September. It is generally expected that the US Fed will be the first to do so, as the US economy is performing the best of the developed countries in the post-crisis period. The group of rate hike supporters among US central bankers seems to be growing, and the Fed thus confirmed its plan to raise rates -2.6% -0.1% -2.6% +4.3% -1.8% +0.1% -2.0% -3.7% +0.5% +4.3% +0.8% -0.1% later this year. This, combined with the upcoming presidential election, brings uncertainty to the market. The first debate between Clinton and Trump was won by Clitnon, according to a CNN poll, which the financial markets are interpreting as better news than if it had been the other way around. The Mexican peso also reacted by strengthening, which is seen as a kind of guessing game for the outcome of the election, due to Trump’s strongly anti-Mexican (anti-immigration) stance. European markets were hit hardest by the problems of Germany’s largest bank, Deutsche Bank. It is facing a hefty fine in the United States for collusion in the mortgage securities market before the financial crisis of the last decade.
Deutsche Bank’s problems:
Deutsche Bank shares are under heavy selling pressure and fell below €10/share for the first time on the last day of September.
The world’s fourth largest bank is facing widespread problems. The causes of the problems are the interest rate manipulation and money laundering scandals in Russia, which have damaged the bank’s reputation. Then there is the move in the last year by the US Department of Justice, which wants the bank to pay €14 billion to settle allegations around collusion in the mortgage securities market before the financial crisis. Although Deutsche Bank was counted among the so-called ‘too big to fail’ banks because of its size, i.e. banks too big for their countries to let them fail, German Chancellor Angela Merkel has previously refused to bail out the financial house. Given that DB is highly intertwined with other financial institutions, its eventual collapse would significantly threaten the entire financial sector. However, according to recent reports, the situation is not so critical, partly a panic caused by investors’ high sensitivity to bad news from the banking sector, which was behind the outbreak of the financial crisis. There is also now leaked information that the US Department of Justice will settle for a lower fine of EUR 4.8 billion, which would no longer be liquidating for the bank.