A monster fine for Deutsche Bank compounded a miserable week for European stocks on Friday, while bonds bounced as weak US retail sales figures triggered a pullback in Federal Reserve rate hike expectations.
News overnight that the US Department of Justice had levied a far bigger-than-expected $14 billion fine on Germany’s largest bank sent financial stocks across Europe tumbling amid worries others could also be clobbered.
Banks shares were on course for a weekly loss of more than 6 per cent, their biggest since Britain’s vote to leave the EU at the end of June. Europe overall has also lagged the rest of the world, with market falls of almost 4 per’cent in Italy, Spain and Portugal.
“With Deutsche Bank facing a $14bn claim against it in the US for alleged irregularities in the way it sold mortgage securities before the financial crisis, you have to wonder if financial regulators are starting to do more harm than good,’’ said ETX Capital analyst Neil Wilson.
“How can banks hope to move on from the crisis?’’
The falls left MSCI’s 47-country All World index backpeddling after gains in Asia and on Wall Street overnight, and ensured it was set for its fourth week of losses in the last five.
The week’s big anxiety that the low interest rate and mass money printing tactics of the major central banks might be losing their potency looked like it had been put on hold, however.
The difference between what investors demand to hold 10- or 30-year government bonds compared to short-term 2-year debt has been climbing sharply, but yields fell broadly after Thursday's lacklustre retail sales data.
That also kept the dollar on course for a second week of falls against the yen as it dropped below 102 yen. Both the Fed and the Bank of Japan hold policy meetings next week that will be closely watched by markets.
“We had an unusually calm summer considering the Brexit vote and the US political risk and I think we are now paying it back,” said ABN Amro's Chief Investment Officer Didier Duret.
“With higher yields and lower equities it has felt like there is no place to hide... But for us this is a short-term move and there is no reason to panic.”
The gap between US five-year note yields and 30-year bond yields widened to as much as 130.10 basis points on Thursday, the steepest since June 27.
Futures traders are now pricing in a 12 per cent chance of a US rate increase this month, down from 15 per cent on Wednesday, according to the CME Group’s FedWatch tool. Friday's consumer price inflation data is the next test for rates-focused traders.
Critical situation
Commodities markets saw wide divergences.
After a sharp jump on Thursday, Brent crude slid 1.2 per cent to $46 a barrel, extending losses for the week to 4 per cent. US crude retreated 1.1 per cent to $43.39, poised to end the week down roughly 5 per cent.
The resumption of exports from Libya and Nigeria and worries that US rig counts would continue to rise fed the long-running theme of global oversupply.
Gold was steady at $1,314.64 an ounce, down about 1 per cent for the week. Industrial metal nickel was looking at a 6 per cent weekly drop whereas copper was set to log its largest weekly rise in two months.
Encouraging signals out of China’s housing market and indications of a revival in its factory sector over the summer have stoked views that demand is quietly cranking up for the third quarter.
“Copper (has) continued to bask in the afterglow of this week's better-than-expected Chinese economic data,” ANZ analysts said in a note.
Despite the broader easing of bond yields in Europe on Friday, there were still signs of strains in Portugal as worries about its finances pushed the gap between its bonds and those of Germany to the widest since February.
Focus was also on a meeting of EU leaders in the capital of Slovakia as they gathered without Britain following the Brexit vote.
The euro was little changed at $1.1233, and Britain’s pound dropped 0.25 per cent to leave it buying $1.3202.
“The point is not to simply expect a solution to Europe's problems from one summit - we are in a critical situation - but rather it is about showing through actions that we can be better,” German Chancellor Angela Merkel told reporters as she arrived in Bratislava.