Friday December 23

Stocks rose today on light trading activity. The S&P 500 rose 0.1% to 2,263 and the Dow Jones rose less than 0.1% to 19,933. Over the course of the week the S&P 500 and the Dow Jones were 0.25% and 0.45% higher respectively. Economic data today showed that new home sales were higher than expected as homebuyers look to purchase before rates rise even further. Additionally consumer sentiment came in strong. Deutsche Bank and Credit Suisse settled with US regulators on mortgage infractions, while Barclays said it would not settle. Barclays stock price fell 0.9% as a result of the uncertainty. Volume in the equity markets today was the lowest since late 2014. On that backdrop the US 2 year rose 1bp to 1.21%. The 10 year fell 1bp to 2.54%. Over the course of the week those yields were both 6bp lower. It was a quiet day in FX markets with the dollar little changed against peers. USD fell 0.2% against EUR to $1.0456. USD fell 0.2% against JPY to Y117.32. USD was unchanged against GBP to $1.2285. WTI rose 0.6% to $53.25 and Brent rose less than 0.1% to $55.08.

The Justice Department reached two large settlements with Credit Suisse and Deutsche Bank stemming from financial crisis era MBS infractions. Deutsche Bank agreed to pay a total fine of $7.2bn. $3.1bn of that is cash that will go to the BoJ. The remaining $4.1bn will go indirectly to consumers who suffered from the crisis and will be spread out over five years. Credit Suisse will pay $5.3bn. $2.5bn will be paid as a penalty and the remaining $2.8bn will go towards consumer relief. Deutsche Bank and Credit Suisse didn’t have many negotiating options as both are relatively low on capital, especially Deutsche Bank. However Barclays did not settle with the Justice Department, and instead the US regulator sued the bank. Barclays CEO Jes Staley says that the fines being imposed on his bank are detached from reality and that the imposed penalty is unnecessarily high given the facts. Barclays had been expecting to pay around $1 to $2bn, however the Justice Department was asking for closer to $5bn in line with Deutsche Bank and Credit Suisse’s settlements.

Italy takes steps to bailout MDPS and support the Italian financial sector. The government authorized the creation of an EUR 20bn fund that will support banks, in particular MDPS. The struggling bank has said that its plan to raise EUR 5bn from private investors has failed. If the bank is rescued by the government, losses will be imposed on junior debtholders which is politically not ideal. However Italy is looking for exemptions that may prevent losses for junior bondholders. One of those exemptions could be the argument that the bank’s bonds were mis-sold to junior investors. If accepted by European Union officials, that could potentially protect retail investors and taxpayers from the bank bailout. The European Commission is responsible for enforcing those rules, and that agency has yet to be tested in a bank rescue plan post EU debt crisis. The bailout will be considered a precautionary recapitalization as opposed to winding down the bank in its entirety. That could be difficult with MDP considering the significant amount of NPLs it holds.

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Friday December 23

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