Week Ahead: Deutsche Bank settlement, Brexit talks, and U.S. jobs report

October 3, 2016

Deutsche Bank’s woes dominated market’s sentiments past week and revived memories of the worst global financial crisis in 2008 when Lehman Brothers went bust. The German bank hit a record low on Friday, wiping almost a quarter of its market cap since the U.S. Department of Justice requested the bank to settle a $14 billion in charges related to miss-selling mortgage backed securities prior to the financial crisis. Fears were intensified on news that several hedge funds that clear trades with the bank pulled billions of dollars to cut their exposure.

Stocks of Deutsche bank then managed to recover later on Friday’s U.S. trading session, surging by 14% on record volume after a report from AFP suggested the bank will pay less than 60% of the initial announced settlement.

The European banking system is clearly going through tough times, with high levels of non-performing loans, squeezed margins due to negative interest rates, tougher regulations, weak economic growth and competition with the FinTech booming industry. However, I’m against comparing Deutsche Bank to Leman brothers as the U.S. investment bank was extremely over leveraged while the German lender still have a solid balance sheet.

Deutsche bank will continue making headlines the week ahead with the adjusted settlement expected to be announced in the next couple of days according to AFP. With one more week to the earning season, expect any news related to Deutsche bank to become a key catalyst to risk.

Finally, some clarity on the Brexit timeline!

Theresa May announced on Sunday that U.K.’s divorce from the EU to start within 6-months. Article 50, the official notification to Britain’s partners will be triggered before the end of March 2017, which gives another two years to agree on the terms of the most complicated divorce in recent history.

The pound’s imminent reaction was a drop of 0.5% against the dollar in early Asian trading session, nothing compared to the 11% freefall after U.K.’s vote to leave the EU on June 23.

Now with timeline being set, the terms-negotiation will be a key driver for sterling going forward, but I expect it to be rough ride in the next few months.

U.S. Jobs

Investors will take a break from politics to shift back into the health of the U.S. economy with an interest rate hike looming on the horizon.

Friday’s non-farm payrolls report will be a key indicator to shape expectations for the Fed’s December meeting. The economy is expected to add 170,000 jobs in September, compared with 151,000 in August, meanwhile unemployment rate is forecasted to held steady at 4.9%.

Average earnings, which is forecasted to rise to 0.3% in September from 0.1% in August will share the same importance of the headline figure, as it might suggest that the labor market finally started to tighten and it’s only about time to start feeding inflation. 

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