Shares are creeping back from their lows on Wall Street, meaning the Dow is now only down 269 points, or 1.7%.
Good news, there’s only one hour to go until Wall Street closes and Manic Monday is over.
Bad news, the US stock market is still heavily in the red. The Dow is down 2.17%, or 351 points to the bad, with the S&P and Nasdaq in deeper trouble:
Deutsche tries to calm CoCo fears
Newsflash: Deutsche Bank has just issued a statement, saying it can meet a crucial debt repayment in April.
The Frankfurt-based bank, which was at the heart of today’s market turmoil, says it has a “payment capacity” of around €1bn. That will cover the €350m due in April on its CoCo bonds — debt which converts into shares, or is wiped out, if a bank hits financial problems and defaults.
As we covered this morning (details here), some analysts fear Deutsche could miss a CoCo payment in 2017, if economic conditions worsen. Deutsche says it will probably have a “payment capacity” of €4.3bn next year in 2017, depending on its operating performance this year.
Britain’s leading experts on the public finances are warning that the turmoil on global stock markets threatens to leave a £2bn black hole in George Osborne’s deficit-reduction plans that could force the chancellor to raise taxes or make fresh cuts in spending to hit his budget targets.
On a day in which share prices crashed in Europe and the US, the Institute for Fiscal Studies said Osborne’s plan to put the UK back in the black by the end of the current parliament was vulnerable to a protracted financial market panic.
The IFS said tumbling share prices – which wiped more than £40bn off the value of the companies quoted on the FTSE 100 Index on Monday – were one of a number of factors that could blow the chancellor’s plan off course in the next four years.
Forecasts that wages growth will be lower than previously expected could knock another £5bn hole in his budget, the thinktank said.
And here’s the full story:
The Telegraph’s Mehreen Kahn points out that the European banking sector has lost a sixth of its value in the last month.
Global stocks were gripped by a fresh bout of panic selling on Monday raising fears over the health of the world’s banking system for the first time since the financial crisis.
European markets slumped to their lowest level in more than two years amid an unremittingly bleak outlook for the global economy and concerns over the resilience of the world’s biggest lenders.
The Euro Stoxx 600 index of leading bank shares fell as much as 6pc in Monday’s trading, closing down 5.6pc, plumbing depths not seen since August 2012. The continent’s lenders have now lost 17.3pc of their value of the last 30 days…. (more here)
Gold hits $1,2000/ounce
Anxious investors are continuing to pile into gold, sending it up to $1,200 per ounce for the first time in over seven months:
So far this year, shares in America’s largest banks have slumped by at least 15% as investors fear a global downturn.
The biotech boom has speedily unwound, too..
There’s no sign, yet, that Wall Street might recover from its early selloff.
The Dow is stubbornly down around 344 points, or 2.1%, at 15,860 points.
The broader S&P 500 is down 2.3%, and the tech stock-packed Nasdaq has shed 2.9%.
That’s nearly as bad as the European selloff, and suggests we’re facing yet more market turbulence.
US technology stocks are being hit hard today.
Tesla, the electric car company, have slumped by 9% today, dropping below $150 for the first time in two years.
European shares slump on growth and bank fears
Global markets suffered a bad start to the week, with the Chinese new year proving as turbulent as the slump in the early days of January.
Although the Chinese markets were closed, that did not end the recent spate of volatility facing investors. Fears about a slowdown in global growth returned with a vengeance, while banking shares were among the poorest performers on worries about the outlook, and the effect of negative interest rates on their business.
On top of that came a cocktail of other concerns, from the prospect of Britain leaving the European Union to concerns about the review of Greek’s progress in meeting its bailout targets.
The rout was widespread, with the Greek market at its lowest for around 25 years and the Eurofirst300 dropped to a near two and a half year low. The final scores showed:
The FTSE 100 fell 158.7 points or 2.7% to 5689.36
Germany’s Dax dropped 3.3% to 8979.36 with Deutsche Bank 9.5% lower
France’s Cac closed 3.2% lower at 4066.31
Italy’s FTSE MIB fell 4.09% to 16,441.2
Spain’s Ibex ended down 4.44% at 8122.1
In Greece, the Athens market lost 7.87% to 464.23
On Wall Street, the Dow Jones Industrial Average is currently down 323 points or 2%.
There seems little justification for the day’s slump in banking shares, said Laith Khalaf, senior analyst at Hargreaves Lansdown:
Markets are clearly worried about a global economic downturn at a time when central banks have little dry powder left to fight off recessionary forces. The tables were turned in the UK stock market today with recent winners suffering from profit-taking, while the miners were virtually the only stocks to keep their heads above water.
The collapse in the oil price has been a big shock to the financial system and its effects are still being absorbed by international stock markets, in particular the implications for global demand. Financials have been really badly hit of late, and in a sign of how dire things have got, some European banks are trading lower than they did during the depths of the financial crisis. There doesn’t seem to be much justification for such a dismal outlook, but markets appear to be stuck in a negative feedback loop at the moment.
A sense of panic seems to be setting in, but any increase in the oil price might help markets, said Tony Cross at Trustnet Direct:
Equities across the globe have kicked off the week in a deeply downbeat mood. London’s FTSE-100 has posted a 2.7% sell-off, pushing the benchmark index squarely back into bear-market territory, but losses across mainland Europe have been even more pronounced. The fact that WTI crude tested territory below $30/barrel once again has done nothing to help matters but we’ve got this overriding fear that another global slow down is imminent and many investors are adjusting portfolios to suit. The theme of risk aversion is buoying precious metals… as gold eyes a break above $1200 an ounce for the first time in over six months.
But 25 stocks [in the FTSE 100 are] sporting losses in excess of 5% on the day, underlying the sense of panic that is creeping in. Economic data remains thin on the ground tomorrow but given at least some of the downside in stocks can be attributed to that renewed weakness in oil, this remains a metric worth watching closely. Anything that fundamentally impacts on supply could be all it takes to instil some confidence in markets, but in the absence of any better news the bears are likely to remain in control.
One reason for the current market problems is the US Federal Reserve ending its quantitative easing programme, says Bank of America Merrill Lynch.
Bloomberg has the story:
Ever since the Federal Reserve began to withdraw monetary stimulus, liquidity has steadily been drying up.
Therein lies the crux of the broader stress in financial markets, according to Bank of America Merrill Lynch, which have seen violent selloffs occur following the surprise revaluations of currencies in Switzerland and China, as well as Japan’s introduction of negative interest rates.
Head of U.S. Mortgages Chris Flanagan and Strategist Mao Ding don’t necessarily lay blame for market dislocations squarely on U.S. monetary policymakers. The two observe, however, that since early 2014—when the Fed began winding down its open-ended asset purchases—liquidity stress has “persistently risen” and served as the proximate cause of the episodic spikes in Merrill Lynch’s Global Financial Stress Index that have since occurred. [They said:]
“This persistence suggests to us that deteriorating liquidity is at the heart of and may be the primary driver of broader rising financial stress.”
More turbulence in the banking sector, which has been by worries about negative interest rates, the outlook for profits and slowing global growth.
Trading in Barclays shares was halted briefly after volatile movements. Now resumed, the shares are down 5.4%.
With China’s markets closed for the new year holiday, it is a worrying sign that share prices elsewhere continue to tumble, says Chris Beauchamp, senior market analyst at IG:
The selling that began this morning has gathered pace across the globe this afternoon, as the US joins in the one-way move.
Chinese investors will feel relieved that their market has taken the week off, but the absence of the volatility provided by Shanghai sends a worrying message – investors in the US and Europe are worried by many things, not least the current interest rate outlook in the US. Recent surveys of fund managers may indicate rising cash balances, but so far these appear to be remaining on the side lines, pulling the rug from under what remains of this bull market.
In a week when economic data is relatively light, it is becoming increasingly apparent investors are struggling to find any positive news on which to create a rally.
Then there are the banks. Jasper Lawler at CMC Markets said:
Banking shares across Europe buckled under the pressure of global growth concerns in concert with the ugly spectre of negative interest rates. Weak earnings from European banks, notably that of Deutsche Bank have seen investors significantly reassess the chance of an earnings turnaround after years of regulatory fines for past misdeeds.
The disappointing earnings across the sector from the big US firms to Credit Suisse whose chief executive asked to have his bonus cut by as much as 50% is refocusing investor attention on bad loan books which have not been addressed since the European crisis. In the days after Deutsche Bank issued a surprise profit warning, credit default swap spreads ballooned as investors started to question the bank’s ability to fund itself. The CDS jump has caused a sharp drop in Deutsche Bank shares.
Markets continue to slide, with the Dow Jones Industrial Average now down around 300 points.
Meanwhile in Greece, the Athens market has closed down 7.87% to 464.23, its lowest level in at least 25 years. Banks – as elsewhere – are among the biggest fallers, down up to nearly 30% in some cases.
Greece’s finance minister Euclid Tsakalotos said he expected the review of the country’s bailout programme to restart next week, and conclude two weeks later.
But with worries about planned pension and tax reforms – which have seen major protests in recent days – have unnerved investors. Manos Hatzidakis of Beta Securities told Reuters:
The market is pricing in financial and political instability, and delays in the review.
Sterling has hit a one week low, falling to $1.4393 amid worries about the outlook for banks and concerns about the effects of any vote from Britain to leave the European Union.
It is also at a 13 month low against the euro.
The recent move by central banks to push interest rates into negative territory is bold but unco-ordinated and could lead to a “race to the bottom,” according to Standard & Poor’s.
The ratings agency said:
Four European central banks–in Switzerland, Denmark, and Sweden, plus the European Central Bank–have adopted negative policy rates, and Japan surprisingly joined the club on January 29 this year. “The Bank of Japan’s decision to follow suit on negative rates is likely to reinforce the trend toward shrinking yields in core government bond markets, as the search for yield spreads from Japan into Europe,” said Standard & Poor’s economist Sophie Tahiri…
“The bold venture into negative interest rates signals to market participants that central banks will use all tools at their disposal to meet inflation targets,” said Ms Tahiri. “The problem is that all developed markets’ central banks face the same deflationary pressures from weak commodity prices and have the same incentive to use their exchange rate to combat those pressures.”
This increasing competition between developed markets’ central banks to stem currency appreciation signals a new phase in the extended aftermath of the global financial crisis. Independent attempts to weaken exchange rates could lead to an undesirable “race to the bottom” among central banks.
Here’s a snapshot of the Dow movers, mainly down of course:
Amid the current worries about the global economy, Europe could start moving up the list according to strategist Graham Secker at Morgan Stanley. In a new note he says:
We struggle to remember many occasions when investor sentiment was quite as bearish and widespread as it feels today. Sure, 2008 was worse as the global financial crisis and fears of global depression created panic in markets, but today’s cool disdain for risk assets still takes some beating. When we were asked by a client this week what reason bullish investors were citing for their optimism, we had to confess that we couldn’t answer as we hadn’t met any in recent times. The collective noun for a group of bears is a ‘sleuth’, but it doesn’t take much detective work just now to identify what investors are concerned about.
Those concerns revolve around the usual suspects – China, emerging markets, dollar, oil etc – but added to that are the fact that central banks are moving towards negative interest rates, which is not particularly positive for equity markets. Secker said he feared any moves higher by stock markets, prompted by relief rallies on positive new, would “prove short-lived as investors increasingly question the value and effectiveness of further central bank action.”
And then there is Europe:
Recent investor caution tends to focus on fears of excess US dollar strength, low oil prices and/or China, but we think it is quite plausible that Europe moves back up the pecking order (to its more usual place some would say!) as we move through 2016. The UK’s forthcoming referendum on EU membership, likely to take place in June, may appear the most plausible catalyst in the short term to raise regional risk premia, but the ongoing migrant issue risks eroding political cohesion over the medium term and political uncertainty is rising in the periphery.
Greece has a daunting debt repayment due this summer, Spain is currently without a government, new European regulations are preventing Italy from adopting an effective ‘bad bank’ solution and the recently elected socialist government in Portugal is reversing course on prior austerity and competitiveness improvements. During a cyclical upswing, markets are prone to overlook such concerns, but the opposite would be true if growth starts to relapse.
Wall Street opens sharply lower
US markets have followed Europe into the red, as fears about the global economy continue to rattle investors.
The Dow Jones Industrial Average is down 220 points or 1.3% while the S&P 500 is down just over 1% and the Nasdaq has fallen 1.7% at the open.
With the Greek stock market at its lowest since at least 1990 and banks bearing the brunt of the selling, here is the huge damage done to the four biggest since the start of the year:
The key is Deutsche’s CoCo bonds, or contingent convertible bonds, which are written down or converted to equity when a bank’s capital falls to a certain level.
CoCo bonds have been introduced since the 2008 financial crisis, to spare governments from funding another bailout. They pay a decent return, to encourage investors to hold them, in return for shouldering the risk if things go wrong.
Bloomberg’s John Glover has the story:
Deutsche Bank may struggle to pay coupons on its riskiest bonds next year if operating results disappoint or litigation costs are higher than expected, according to analysts at CreditSights Inc.
Bonds and stock of Germany’s largest bank have plunged this year, with the shares shedding 35% of their value and its contingent convertible bonds — known as CoCos, or additional Tier 1 securities — turning in a similar performance. The cost of protecting the company’s subordinated debt from default for five years using credit-default swaps has more than doubled since the end of 2015, rising to 420 basis points, a four-year high, from 187.
“While we are confident about 2016 coupons, we are less so about coupon payments in 2017,” CreditSights analyst Simon Adamson wrote in a note to clients today. Deutsche Bank will do “everything in its power to pay them” because it will need to issue such bonds in the future, he said.
With Citigroup warning of a potential ‘death spiral’ if investors behave irrationally to the stronger dollar/weaker commodities/harmed emerging markets cycle that the world appears to be trapped in at the moment, the markets have taken another kicking this Monday. It doesn’t help, of course, that the day’s economic calendar is so sparse, with investors left pondering the purely negative side of things as the morning continued.
The FTSE sank by nearly 2%, plummeting past 5800 in the process as Brent Crude fell back towards the $33 per barrel mark. The DAX, always the liveliest index in instances like this, lopped off a whopping 2.6% in value as the morning progressed, and is in serious danger of falling below the 9000 mark; the CAC, meanwhile, matched its dramatic German peer with its own 2.5% drop.
Fears surrounding non-performing loans and other deep-rooted issues in the Italian banking sector have driven nerves, while a slew of weak earnings from large banks such as Credit Suisse and Deutsche Bank have added to concerns.
Weak growth provides an unsupportive backdrop, as does the possibility of more deeply negative benchmark interest rates.
And that’s why Commerzbank has dropped by 4.7%, Deutsche Bank is down 3.4%, and BNP Paribas has lost 3.3%.
UK banks are also suffering, with Lloyds and Royal Bank of Scotland both down 1.7%
In another sign of angst, the gold price has just hit a three month high.
Bullion is swapping hands at $1,171 per ounce, the most since the end of October.
It has already gained around 10% since the start of 2016, as concerns over the world economic outlook have grown.
The OECD think tank has issued new economic indicators for investors to digest (in between hammering the SELL button).
It sees ‘tentative’ signs that the Chinese economy is bottoming out, but slowing growth in the US.
The OECD is also quite upbeat about Europe, saying:
In the euro area as a whole, and in Germany and Italy, the composite leading indicators signal stable growth momentum while in France the outlook is for firming growth.”
We’ll find out on Friday if they’re right, when the latest eurozone GDP figures are published (starting at 6.30am GMT, so set your alarm clocks).
How worried should we really, really be about a global recession?
No-one knows for sure. But investment bank Goldman Sachs reckons it is still unlikely, despite fears that the recent market turmoil will feed into the ‘real economy’.
They have estimated that there is an 18% chance that the United States goes into recession over the next year, rising to 23% over the next two years.
For the eurozone, it’s a 24% risk this year, up to 38% by the end of 2017.
So hardly a done deal. Goldman’s Jan Hatzius agues that
“The recent market weakness should provide good risk-adjusted opportunities for those brave enough to defy Mr. Market’s gloomy prognosis about the world economy.”
The selloff in European markets this morning suggests Mr Market isn’t convinced….
The Greek stock market is still falling, and now down over 6%. That’s pretty worrying, given the political tensions in Athens.
Wall Street is expected to suffer losses when trading begins in New York, in just over three hours time.
According to the future market, the Dow Jones industrial average will fall 1.2% at the open. The tech-heavy Nasdaq index is being called down 1.6%.
The oil price is falling again, hit by concerns over the global economy.
Brent crude has dropped by 1.7% to $33.47 per barrel, wiping out last week’s rally.
Confirmation that Germany’s stock market is at a 15-month low:
The Greek stock market has slumped by 5% to its lowest level since 2012 – when it nearly left the eurozone.
That’s partly due to the general wave of worry today, but it also reflects the standoff over Greece’s bailout.
Creditors are pushing the government to make deeper pension reforms, while protestors flocked to the streets last week to call for less austerity.
Deutsche Bank in the firing line
European banking shares are bearing the brunt of today’s rout.
In Germany, shares in Deutsche Bank have tumbled by 4.35%.
And the cost of insuring Deutsche’s debt against default, using a credit default swap or CDS, has hit the highest level since July 2012.
That underlines how much nervousness is in the markets today:
Last month, Deutsche announced that it suffered a loss of €6.7bn last year.
New CEO John Cryan said it was ‘sobering’, and some analysts fear Cryan will struggle to turn Deutsche around in the current market turmoil.
The euro zone proves it is not immune to the enormous loss of momentum in the global economy.
The global economy is thus currently on the brink, led by a US economic downturn!
Sentix blamed “the loss of dynamism” in Germany and the United States, while Latin America and Eastern Europe are in a worse state.
And Sentix singles out the Federal Reserve’s interest rate increase last December, which is “now considered a big mistake by the majority of investors”.
It also pointed to the slump in commodity prices, and its impact on emerging markets.
Citi adds to gloom with ‘death spiral’ warning
Wall Street bank Citigroup has contributed to the sombre feeling in the markets, with a research note last week warning that we could face a ‘death spiral’.
The bad news, according to Citi, is that the dollar could keep strengthening, driving commodity prices lower, hurting emerging markets (EM), and thus pushing the dollar higher etc etc.
The good news is that it probably won’t happen though, if ‘rational behaviour’ kicks in .
CNBC has the details:
“The world appears to be trapped in a circular reference death spiral,” Citi strategists led by Jonathan Stubbs said in a report on Thursday.
“Stronger U.S. dollar, weaker oil/commodity prices, weaker world trade/petrodollar liquidity, weaker EM (and global growth)… and repeat. Ad infinitum, this would lead to Oilmageddon, a ‘significant and synchronized’ global recession and a proper modern-day equity bear market.”
Stubbs said that macro strategists at Citi forecast that the dollar would weaken in 2016 and that oil prices were likely bottoming, potentially providing some light at the end of the tunnel.
“The death spiral is in nobody’s interest. Rational behaviour, most likely, will prevail,” he said in the report.
Great headline – but maybe the report is a little overblown? One money manager thinks so….
The Economist Intelligence Unit is also concerned about the economic situation.
Their managing director, Robin Bew, tweets that they think UK interest rates will remain at 0.5% until 2019
In another sign of unease, shares in UK chipmaker ARM Holdings have slipped by 4% to the bottom of the FTSE 100 leaderboard.
ARM reports results on Wednesday, and analysts fear it is suffering from the slowdown in the US technology sector. Last week, Apple predicted that sales of the iPhone (which uses ARM chips) will start to fall later this year.
Another UK tech firm called Imagination, which designs chips, warned this morning it will make an operating loss this year. It blamed a slowing market, and uncertainty over China.
Peter Elston, chief investment officer at Seneca Investment Managers, argues that we’re unlikely to be entering a recession yet.
Recessions generally start because central banks are trying to restrain economies, he told Bloomberg TV this morning. But right now, inflation pressures are very low, and economies are still some way from full capacity.
“This would be an extremely unusual place for a global recession to start.”
But arguably, we’ve been in an “extremely unusual place” since the financial crisis, with central bank stimulus has been underpinning growth. Ultra-low interest rates helped struggling firms limp on and quantitative easing pumped up the stock market. Still, though, global growth is weak and vulnerable to the impact of higher US interest rates – unless the Fed changes course….
Shares in engine maker Rolls Royce have shed 2% at the start of trading, as the City braces for further problems.
After hitting shareholders with five profit warnings in two years, Rolls-Royce could now slash its dividend when it posts its annual results on Friday.
My colleague Graham Ruddick explains:
The company has been hurt by cuts to defence spending by western governments, a fall in demand for corporate jets, and a slump in the oil price.
European stock markets have begun the new week rather gingerly.
The FTSE 100 index has gained 20 points, or 0.4%, but Germany’s DAX is only up 0.1% and the French CAC is slightly lower.
Chris Weston of financial spread-betting firm IG says this is the biggest issue in the markets today.
Will we see a recession in the US and other developed nations? There is little doubt this is the number one question being asked right now.
He points out that insurance against company’s defaulting has spiked in value recently, especially for banks. And the stock market turbulence, and the recent surge in the US dollar, show how financial conditions have deteriorated.
If that feeds through to the real economy, we could be in serious trouble.
As Chris puts it:
The strong fear is this stress – that is clearly being felt in the financial markets – will start to filter through to Main Street.
British business confidence hits three-year low
We have some worrying news to start the week — confidence among UK executives has hit its lowest level since 2013.
Concerns over Britain’s upcoming EU referendum are adding to worries over the global economy. And business leaders now fear their companies are suffering.
That’s according to a regular survey conducted by BDO, the professional services firm.
It warns that the UK is now suffering from problems in the global economy, particularly China’s slowdown and signs of weakness in America. The turmoil in the Middle East is also hitting confidence.
Peter Hemington, partner at BDO LLP, warns:
“Global headwinds are finally hitting business confidence and the added uncertainty of EU referendum just round the corner is fuelling concerns.
This knocked BDO’s Business Optimism Index – which predicts growth six months ahead – down to 100.0. That’s the tipping point below which firms expect their output growth to drop under the long term trend rate.
So what can be done? One option, the BDO says, is for the government to introduce a zero-rate of VAT on companies that sell their goods to exporters.
Manufacturers could certainly use some help. The sector is already in recession, even though the wider UK economy grew by a solid-enough 0.5% in the final quarter of 2015.
BDO found that manufacturing output contracted again this month, which it attribued to “decreasing global confidence”.
Dr Gerard Lyons, the Mayor London’s economic advisor, points out that other measures were less gloomy:
Introduction: Waiting for Janet Yellen
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
It looks like a quiet start to the week, as investors wait to hear from Federal Reserve chair Janet Yellen.
Yellen testifies to Congress on Wednesday and Thursday, and will give her take on the recent turmoil in the financial markets, and the state of the global economy.
She’s also likely to be questioned on whether the Fed was right to raise interest rates in December, and whether future hikes are now on the back-burner.
It could be a tricky balancing act for Yellen; she won’t want to fuel the current market angst, but nor can she sound complacent.
Thomas Costerg, of Standard Chartered Bank in New York, predicts that Yellen will keep her options open regarding future interest rate rises:
“She may emphasize the positives in the U.S. economy, particularly the still-strong labor market.
Looking ahead, she may sound more cautious, and she will likely highlight that the negatives are mostly from abroad and that they are watching the global picture closely.”
City traders are also digesting the news that China burned through another $99.5bn in foreign exchange reserves last month, defending the yuan.
That takes China’s FX reserves down to their lowest level since 2012, although Beijing still has $3.23 trillion fo firepower.
Those figures haven’t alarmed Chinese investors, though, as they are now on holiday for the Chinese New Year.
We’re expecting a quiet start to trading in Europe, with the main indices expected to rise.
And there’s not much in the economic calendar today, apart from the monthly survey of eurozone Investor Confidence, from Sentix, at 9.30am GMT.