Monday September 26

Stocks fell today as financial shares lagged indices. The S&P 500 fell 0.9% to 2,146 while the Dow Jones fell 0.9% to 18,094. Investors drew concern today from renewed questions about Deutsche Bank’s status and financial health in light of recent fines from the US Justice Department. As a result of these concerns the KBW Bank index fell 2.12% Contributing to the uptick in concerns was comments from Angela Merkel suggesting that the German government would not step in and help Deutsche Bank, which is potentially doubted by some analysts if the worst case scenario were to happen. The yield curve bull flattened possibly in a flight to quality trade. The 10 year yield fell 4bp to 1.58% and the 2 year yield fell 1bp to 0.74%. Accordingly 2yr vs 10yr bull flattened to 0.84%. Oil prices rallied ahead of the Opec meeting, however rising prices were not enough to positively influence the stock market. WTI rose 2.5% to $45.57 and Brent rose 2.3% to $46.94. In FX markets the dollar was softer against peers for the most part. USD fell 0.2% against EUR to $1.1253. USD fell 0.7% against JPY to Y100.31. USD fell marginally against GBP to $1.2972. The Mexican peso was 0.6% softer against USD possibly in anticipation for the presidential debates tonight. Turkish assets suffered as a result of a downgrade to junk status from Moody’s. The lira depreciated to TL2.9794 while the 10 year Turkish bond yield eclipsed 10%.

Analysts expect that S&P 500 companies will report falling earnings in the third quarter after some had previously hoped for a turnaround. Earnings growth has been negative since the second quarter of 2015, however some research analysts had predicted that the third quarter would mark a return to positive territory. Researchers now predict that earnings will fall 2.3% from the prior period. Contributing to this downturn is a 66% expected drop in year over year earnings from the energy sector. Materials and consumer-discretionary companies are also expected to post declines. One silver lining to this downward trend in quarterly earnings is that S&P 500 earnings would be positive in the majority of the previous quarters excluding the oil sector. It is also important to point out that since the second quarter of 2015 which began the downward trend in earnings growth stock prices have risen 4.7%. This trend is a result of extensive monetary easing, low interest rates pushing up valuations as well as a search for yield given the absence of returns elsewhere in global markets. The S&P 500 is currently valued at a ttm month p/e of 19.7 which is higher than the average of 16. Fourth quarter earnings growth is expected to be positive.

Deutsche Bank shares are selling off on capital concerns in light of the recent fine. In Europe DB is down more than 6% today alone bringing the YTD losses to 52%. The US Department of Justice announced that it is fining DB $14bn stemming from MBS related actions. Although DB said it won’t pay anywhere near that amount and analysts expect that it will be somewhere around $2-5bn, even that lessened amount could call into question their capital levels. Angela Merkel in the past has suggested that Deutsche Bank merge with another company, and that the German government will not support DB which holds $6.2bn in litigation reserves. In an effort to boost capital levels Deutsche Bank John Cryan has been cutting costs and exiting capital intensive businesses. The company is planning to raise around $4bn through a 20% stake in a Chinese bank.

Monday September 26

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