Fragile confidence of global economy - AmpGFX


Greg Gibbs, Director at Amplifying Global FX Capital, notes that the global equity market was roiled on Thursday by a Bloomberg news story that some of Deutsche Bank’s customers had withdrawn collateral held at the bank to facilitate their trading business with the bank. 

Key Quotes

“This action suggests that some customers of Deutsche Bank are reducing direct exposure in case the bank were to experience bankruptcy.

Bankruptcy is extremely unlikely, as almost certainly, Deutsche bank, as a Globally Systemically Important Bank (G-SIB), would receive all the liquidity it needs to ensure it can settle all trades, and indeed receive government backing, if required, to stay in operation.

Nevertheless, customers would not want any hint of disruption in their capacity to make and settle trades.  As such, they might feel it prudent to shift collateral to alternative banks to broaden their capacity to keep trading in case Deutsche bank faces even a short-term disruption.

At issue is customer and counterparty confidence in Deutsche Bank.  If confidence ebbs it can snowball and threaten to generate a widespread call on Deutsche Bank’s sources of funding.  The Bank would then be forced to curtail its trading activities and ask for ECB and/or government support, creating considerable damage to its reputation.

Notwithstanding the political distaste for bailouts, Deutsche Bank would almost certainly receive one and avoid major systemic risk.  But such an event would probably generate significant downward pressure on bank shares, it would exacerbate concerns that the ECB’s easy monetary policy is not working, further increase regulatory pressure on the banking system globally, and there would be a broader fallout to asset prices and global economic confidence.

This fear accounts for the contagion from a Bloomberg news story to global risk appetite.  However, confidence in Deutsche Bank’s capacity to remain in business and service its customers could be quickly restored.  As mentioned, at the end of the day, it is almost certainly likely to receive all the ECB and/or government support it requires. Investors might then  treat it as a troubling case that may or may not need government support to restore its financial stability over the medium term, and revert to seeking out other higher yielding assets.

As such, we could again revert to overall strength in other equities and high beta assets, including higher yielding emerging markets and commodity producer assets and currencies.  As discussed, low global bond yields, while undermining banks shares, tend to support the broader asset market.  It is far from clear that the Deutsche Bank’s problems will have a sustained negative impact on global markets.

The problems at Deutsche bank have been around, albeit increasing, for over a year, intermittently dampening broader investor confidence, but on the whole, it has not had a sustained negative impact.”

 

Share: Feed news

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.

If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.

FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.

The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.

Recommended content


Recommended content

Editors’ Picks

USD/JPY pops and drops on BoJ's expected hold

USD/JPY pops and drops on BoJ's expected hold

USD/JPY reverses a knee-jerk spike to 142.80 and returns to the red below 142.50 after the Bank of Japan announced on Friday that it maintained the short-term rate target in the range of 0.15%-0.25%, as widely expected. Governor Ueda's press conference is next in focus.  

USD/JPY News
AUD/USD bears attack 0.6800 amid PBOC's status-quo, cautious mood

AUD/USD bears attack 0.6800 amid PBOC's status-quo, cautious mood

AUD/USD attacks 0.6800 in Friday's Asian trading, extending its gradual retreat after the PBOC unexpectedly left mortgage lending rates unchanged in September. A cautious market mood also adds to the weight on the Aussie. Fedspeak eyed. 

AUD/USD News
Gold consolidates near record high, bullish potential seems intact

Gold consolidates near record high, bullish potential seems intact

Gold price regained positive traction on Thursday and rallied back closer to the all-time peak touched the previous day in reaction to the Federal Reserve's decision to start the policy easing cycle with an oversized rate cut.

Gold News
Ethereum rallies over 6% following decision to split Pectra upgrade into two phases

Ethereum rallies over 6% following decision to split Pectra upgrade into two phases

In its Consensus Layer Call on Thursday, Ethereum developers decided to split the upcoming Pectra upgrade into two batches. The decision follows concerns about potential risks in shipping the previously approved series of Ethereum improvement proposals.

Read more
Bank of Japan set to keep rates on hold after July’s hike shocked markets

Bank of Japan set to keep rates on hold after July’s hike shocked markets

The Bank of Japan is expected to keep its short-term interest rate target between 0.15% and 0.25% on Friday, following the conclusion of its two-day monetary policy review. The decision is set to be announced during the early Asian session. 

Read more
Moneta Markets review 2024: All you need to know

Moneta Markets review 2024: All you need to know

VERIFIED In this review, the FXStreet team provides an independent and thorough analysis based on direct testing and real experiences with Moneta Markets – an excellent broker for novice to intermediate forex traders who want to broaden their knowledge base.

Read More

Forex MAJORS

Cryptocurrencies

Signatures