The biggest news in the financial markets yesterday was Deutsche Bank. The shares of DB have fallen more than 7% since yesterday. This month alone, the share prices have plummeted more than 30%. However, the Dow was pretty resilient to the news and merely dropped 1%. It seems that people don’t think Deutsche Bank will become another Lehman Brothers.
Normally, news such as this would have sent Euro reeling. However, Euro pretty much traded sideways all day yesterday. If this were a Lehman Brothers re-occurrence, EUR/USD would have probably dropped more than 300 pips.
In fact, German yields are up and U.S. yields are down. People somehow believe that Deutsche Bank is too big to fail even though the bank could owe up to $14 billion to the U.S. Department of Justice, who is charging the company for legal costs and settlements related to their investigation into the bank’s mortgage backed securities.
The big question now is how Deutsche Bank will raise capital. While Chancellor Merkel has denied to offer a bailout, the best possible outcome would be for the bank manages to negotiate down the U.S. Department of Justice’s fine. Consequently, Deutsche Bank’s troubles have also raised concerns about other banks in Europe such as Credit Suisse and Barclays, which are also in mortgage settlement talks with the U.S. government.
Does this mean Europe’s banking crisis has returned? Financial markets do not like crisis like this. It is going to be a major risk to the U.S. equities. If Europe’s troubles escalate, the Federal Reserve will be less likely to raise interest rates in December. The financial markets are going to be volatile in the coming days for sure.