Europe set to open lower on Deutsche Bank concerns

CMC Markets

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It’s been a pretty good quarter for equity markets despite the turmoil in the aftermath of the Brexit vote, though the gains have been flattered in some parts by the fact that we started the quarter at the lower end of the recent ranges.

Despite this positivity and the rebound in commodity prices which has helped along with this week’s surprise OPEC pledge to cut production, let’s not call it a deal yet, given how woolly some of the details are, it is hard to escape the feeling that as we head into Q4 we could well be building up for a bout of turbulence.

It is banking stocks that are the main fault line of these concerns and today they are likely to be centre of attention once again, as we come to the end of the week, month and quarter. Asia markets have slid lower as Japanese inflation once again showed no signs whatsoever of stirring coming in at -0.5%

After hitting three decade lows earlier this week the last two days appeared to offer some respite to Deutsche Bank’s share price in European trading, as the shares managed to arrest some of the recent downward momentum.

This looks set to get undone today after reports in the US that some customers had reduced their financial exposure to the bank, and moved some of their exposure to other firms. While these firms represent a fairly small part of the banks clients, as a weather vane in the current febrile environment, it doesn’t exactly represent a vote of confidence either, and sent the US listed shares of the bank to a record low.

This could well trigger a similar negative reaction when the German listed shares start trading later this morning.

The selloff in the share price trickled down into the rest of the US trading session, causing US markets to finish sharply lower, with financials leading the way, and we could well see a sharply lower open for European markets when trading starts later this morning, with the DAX likely to be hardest hit.

Deutsche Bank isn’t exactly on its own with respect to its difficulties in turning a profit, sector peer Commerzbank yesterday announced 9,600 job losses and suspended its dividend.

If these share price declines continue, speculation is likely to increase as to what actions the German government might take with respect to reassure investors about supporting the German banking system.

Having already nailed their colours to the mast with respect to their reluctance to step in and help the bank, German politicians appear to be playing a game of chicken with the market, in the hope that the problem will go away.

This is not a sensible strategy where markets are concerned, despite the complicated politics, and German authorities could well find out the hard way that their “squeaky bum time” could come sooner rather than later. While one can sympathise with their distaste for bailouts or rescues, there comes a time when you need to have a Plan B in place just in case.

Away from the tribulations of the banking system it’s a big data day, with the pound coming under pressure again ahead of the final iteration of UK Q2 GDP which is expected to come in unchanged at 0.6%, 2.2% annualised, though there is a risk that the data in June could pull these numbers down a touch, particularly business investment, ahead of the Brexit vote.

There is also the latest September EU CPI data which is expected to show an uptick after the increase seen in the German numbers yesterday. A rise of 0.4% is expected, up from 0.2%, while the EU Unemployment rate for August is expected to fall to 10%, down from 10.1%.

EURUSD – the euro appears to be consolidating between two converging trend lines with support at 1.1150 and resistance at the 1.1300 area. A break either side could well trigger a sharp 200 point move in either direction.

GBPUSD – the pound is struggling to rally but while above trend line support just above 1.2900 the risk remains for a move higher, though a potential break would target the July lows just below 1.2800. We need a rebound through the 1.3120 level to stabilise, and break the cycle of weakness.

EURGBP – the key reversal day seen this week after the twin peaks at the 0.8720 area, suggests we could be susceptible to a break lower on a move through the 0.8600 level, for a test back to the 0.8480 area. A break through the 0.8730 area targets a potential move towards 0.8800.

USDJPY – continues to look weak with a retest of the 99.50 support a distinct possibility. While below the 103.00 area the prospect of a move through 99.50 towards 96.00 remains.

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