The risk of escalating banking sector problems put downward pressure on European indices today. Investors had hoped that the risk would stabilize with the takeover of Credit Suisse by UBS bank (UBSG.CH). This did not happen, however, and the redemption of AT1 bondholders has set a potentially dangerous precedent. Market attention is now focused on Deutsche Bank (DB.DE) shares, which are down more than 12% today. Its valuation is deepening its discount to book value and credit default swaps (CDS) have climbed to levels last seen in 2020. This indicates that the speculative market is increasingly confident that the institution's problems will get worse. Yesterday's comments from Janet Yellen, who conveyed that regulators were prepared to support banks with additional liquidity, did not sustainably improve market sentiment. Instead, investors became convinced that the crisis was not over. In addition, the rating agency Moody's indicated yesterday that the problems of US banks may be far from over.
What's more, we are seeing huge buying pressure on government bonds of the most developed economies today. German Bunds are gaining more than 2.5% and US T-Bonds are up 1.36%. DAX (DE30) futures are down more than 2.2%. Weak sentiment also prevails on the UK benchmark UK100 and the French CAC40.
The TNOTE is today breaking out the top from the very important resistance outlined in the medium term. Source: xStation5
Deutsche Bank's credit default swaps illustrate the increasing propensity to hedge against a potential bankruptcy and default of the German institution. Source: Bloomberg
OIS swaps are pricing in a near 73.5% chance of a rate hike at the FOMC meeting in May and a 65.5% chance of a 25bp rate cut at the next meeting in June. Source: CME
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