SVB finds a buyer, Deutsche Bank teetering

Deutsche Bank shares tumbled 13% on Friday as investors bought up credit default swaps (CDS) in anticipation of a possible bank run, raising significant questions about the health of Germany’s biggest lender.

Key Factors for Today

- European markets are set for a positive open, but banking risks remain
- US futures point to higher open on Wall Street
- First Citizens to buy Silicon Valley Bank’s US division, including deposits and loans
- Russia stations nuclear weapons in Belarus in an escalation of NATO stand-off
- Widespread protests across France to Macron’s pension reform

Market movers

- Gold drops $10 (0.5%) as the need for havens diminishes for now
- Oil rises on Monday, building on last week’s gains
- ASX and Nikkei rise on Monday, China / Hong Kong indices lower
- Euro steady after a heavy decline on Friday amid European bank risk
- Pound rises after falling on Friday amid European contagion risk

Econ Calendar

- Germany IFO (9am)
- German Buba President Nagel speech (3.30pm)
- BOE Governor Bailey speech (6pm)
- Fed’s Jefferson speech (9pm)

Earnings

- Carnival Corp & plc

Deutsche Bank bank from the brink

There is some relief in markets on Monday that Deutsche Bank has made it through the weekend and on the news that First Citizens Bancshares (FCNA) will buy Silicon Valley Bank. It likely isn’t the end of global banking troubles, especially after the Bank of England and European Central Bank pushed ahead with more rate rises last week - and many banks are holding the same in the red government bonds as collateral that SVB was.

Deutsche Bank's five-year CDS surged to 222 basis points on Friday, the highest level since late 2018, while UBS's CDS jumped to 139 basis points. As a reminder, credit default swaps are a type of derivative instrument used by investors as a kind of ‘insurance’ against the credit risk of another investment. Suppose an investor who has bought the bonds of an institution (for example, DB) is worried the institution might default on the bond. In that case, the investor can ‘swap’ the default risk with another investor in exchange for paying them for the CDS.

However, for now, the news that the bank that kicked off the latest banking crisis has found a buyer is offering temporary relief and some hope that the worst might be behind us. Chatter that the Federal Reserve might expand its new lending programme (the BTFP) is also offering some support. That positive sentiment is filtering through to stock markets, which are rising as well as high
beta currencies like the pound and euro. On the flip side, demand for haven assets is down, weighing on the price of gold and the US dollar.

Should this newfound stability continue, then risk assets should continue to perform better. Those who think the crisis is not over might begin to think about taking the other side of these short-term moves.