Sentiment on global financial markets can change in an instant and with that shift, global companies can shed billions of dollars in value.
- Last night Germany’s Deutsche bank felt the wrath of the financial markets, with stocks closing down at 8 per cent
- For the bank, which has well over $1 trillion in assets at 80,000 employees, the slighest whiff of trouble is a source of concern
- A surge in the price of the bank’s credit default swaps sparked the sell-off
Silicon Valley Bank, Signature Bank, First Republic and Credit Suisse have all felt the wrath of the financial markets.
Last night, Germany’s Deutsche Bank was in the firing line.
At one point in the trading session, the stock was down 14 per cent, but it recovered to close down 8 per cent.
However, for a major international bank with well over $1 trillion in assets and more than 80,000 employees, even the slightest whiff of trouble at the bank is a source of concern.
A surge in the price of the bank’s credit default swaps sparked the sell-off.
It’s a form of insurance for investors if they feel like there’s an increased chance of not getting their money back.
They “swap” the risk of a negative return on their investment with another party, for a price.
But it’s also a key measure of financial risk — especially when it’s associated with a bank that’s deemed “too big to fail”.
“Another brick in the wall [of the global financial system has been] attacked by traders,” Marcus Today’s Henry Jennings said.
“It’s a relatively easy target given the restructuring that Deutsche has been undertaking in recent years.
“The German government will stand behind Deutsche come what may.
“There is no easy marriage for them so there’s no alternative.
“It is starting to look like central banks will have to pause [their interest rate hikes in] the fight against inflation.
“Financial stability is far more important.”
There’s no question about Deutsche Bank’s solvency or its financial strength.
The issue relates to uncertainty in financial markets around how vulnerable strong banks are to those that have already collapsed, and whether they have any unrealised weaknesses.
“It’s entirely rational for the market to start searching for the next domino after the Silicon Valley Bank and Credit Suisse debacle,” professional bond investor Angus Coote said.
“Central banks won’t like it one bit but it’s entirely reasonable for investors to be worried about preservation of capital in this environment over the prospect of returns.”
In simple terms, global investors are now worried about not losing money, as opposed to making money, and they’ll dump a stock in a heartbeat if they sense any sort of financial stress.
Meanwhile in the United States, authorities continue to reassure bank customers and investors there’s simply nothing to worry about.
The multi-regulator Financial Stability Oversight Council agreed overnight (Australian time) that the US banking system remains “sound and resilient” despite stress on some institutions.
“The Council discussed current conditions in the banking sector and noted that while some institutions have come under stress, the US banking system remains sound and resilient,” the Treasury said in a statement.
However some analysts say any commentary from authorities about the stability of the financial system raises concerns in of itself — that is, in “normal” times it’s simply not necessary.
A wave of central banks have pushed ahead with interest rate increases over the past week.
It’s curious because some of the banking stress comes from tighter financial conditions.
Central banks seem determined to continue their fight against inflation while putting out banking crisis spot fires as they see them with other tools at their disposal.
Last night’s financial markets volatility though is a sobering reminder the international banking crisis has not been resolved just yet.