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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden (until 2.00) and Nick Fletcher

Deutsche Bank shares jump on hopes of $5.4bn US settlement – as it happened

The headquarters of Germany’s Deutsche Bank in Frankfurt, Germany.
The headquarters of Germany’s Deutsche Bank in Frankfurt, Germany. Photograph: Kai Pfaffenbach/Reuters

Wall Street closes higher as Deutsche fears fade

The New York Stock Exchange on Wall Street.
The New York Stock Exchange on Wall Street. Photograph: Mark Lennihan/AP

The closing bell has rung in New York, signalling the end of the trading day, the week, the month and indeed the quarter.

And shares have finished higher, after a wild old day in the markets.

The Dow Jones has finished up 163 points, of 0.9%, at 18,306 points.

Both the S&P 500 and the Nasdaq gained 0.8%.

Financial stocks led the rally following those reports that Deutsche could receive a fine of just $5.4bn from the DoJ; much less than the opening shot of $14bn.

Deutsche Bank’s US-listed securities closed up around 14%, clawing back all yesterday’s losses, and more.

Traders seem to have concluded that the panic that gripped the markets 27 hours ago, following reports of hedge funds cutting exposure to DB, was overdone.

But still, the health of the German banking giant is still the main story; and remember, we still don’t have any confirmation that a deal with the DoJ is imminent.

As Gennadiy Goldberg, interest rates strategist at TD Securities in New York, puts it:

“We are very much being driven by headline risks at Deutsche Bank.”

And that really is for tonight, unless that deal comes soon.....

An important point:

(As explained earlier, these CoCo bonds are high-yielding debt that convert into equity if the bank runs short of capital)

Here’s a handy list of tonight’s market-moving US news, for anyone away from their terminal (or bereft of one):

Get caught up on Deutsche Bank

Here’s Jill Treanor’s story about the latest developments in the Deutsche Bank saga:

Traders are also getting impatient for news about a possible settlement between Deutsche and the US authorities...

Nothing momentous to report yet.... but with one hour’s trading to go, Deutsche Bank’s US shares are still up a mighty 15% tonight.

That means investors are still clinging to hopes that the bank will secure a DoJ fine that doesn’t wipe out its capital base.

The excitable talk about a new Lehman Brothers moment has also calmed down, as traders digest the fact that Deutsche has a lot of assets, and plenty of liquidity too.

Elsewhere, in a week when Opec looked like it was on track to curb output to support oil prices, US drillers continued to bring more rigs on stream.

The weekly Baker Hughes report showed:

US oil rigs rose this quarter by the largest amount in two years, according to the report.

On that note, and with Deutsche Bank’s US shares now up 14%, it’s time to close for the evening, although we’ll try and pop back in to cover any momentous events should they occur. Otherwise, thanks for all your comments, and we’ll be back tomorrow.

Turnaround for markets in volatile trading

Investors in Deutsche Bank must be feeling giddy after the wild gyrations in the bank’s share price in the course of just one day.

An early 10% slump followed reports that a number of hedge funds had cut their exposure to the bank. But reassurance from Deutsche chief executive John Cryan that the bank had strong fundamentals helped limit some of the damage, and the shares really surged near the end of the trading day on talk its US fine - the cause of much of the recent gloom around the bank - might be reduced from $14bn to around $5.4bn.

So Deutsche’s German shares ended up 6.39% on the day at €11.57. The US shares are currently up 13%.

The rebound dragged the financial sector and indeed most of Europe’s markets into positive territory after their early falls. But the FTSE 100 failed to regain all its lost ground. The final scores showed:

  • The FTSE 100 fell 20.09 points or 0.29% at 6899.33, although the index is up 1.69% on the month and 6% on the quarter
  • Germany’s Dax added 1.01% to 10511.02
  • France’s Cac climbed 0.1% higher at 4448.26
  • Italy’s FTSE MIB rose 0.38% to 16401.00
  • But Spain’s Ibex ended down 0.19% at 8779.4
  • In Athens, the Greek market dipped 0.48% to 565.53

On Wall Street the Dow Jones Industrial Average is currently up 171 points or 0.9%.

And now this:

Deutsche Bank shares jump on hopes of US settlement

Another report is doing the rounds suggesting that Deutsche Bank may only pay $5.4bn in a settlement with the US Department of Justice, rather than the $14bn initially suggested.

AFP has reported the bank is close to a settlement, and even though the $5.4bn figure is the same as in a JP Morgan note for non-US loans, the bank’s shares have moved sharply higher.

The Department of Justice is not commenting, but Deutsche Bank chief executive John Cryan is still in the US so a deal is not implausible. The bank is also not commenting, according to Reuters.

The banks’s US shares are up 13% while the German shares have added 6% after their earlier slump.

Updated

Chris Beauchamp, chief market analyst at IG, said:

With the end of the quarter now upon us it is not surprising to see some last minute rallies in risk assets, as institutional investors look to spruce up their portfolios, but overall the bears have been denied the selloff for which they have been looking all week. Dip buying, it seems, is alive and well as an art form. Banks continue to dominate the lower reaches of the FTSE 100, as the prospect of further travails for Deutsche loom large over the sector

Ironically, Deutsche shares themselves have staged an impressive recovery, with more than a few shorts probably getting cold feet given the possibility of more news over the weekend that could easily send the shares soaring anew.

Goldman Sachs estimates that Deutsche Bank will end up paying between $2.8bn and $8.1bn, rather than the $14bn figure from the Department of Justice. But its that there is some urgency to resolve the issue.

The volatility in Deutsche Bank’s shares over the last day or so proves the point. Goldman said:

We believe Deutsche Bank’s liquidity position...is stable – and further strengthened by ECB funding backstops, which remain available to all Eurozone banks. This said, the reaction of (admittedly less liquid) the ADR to a single piece of news flow demonstrates the extent of concern in the market. As we highlighted previously, as market concerns intensify, achieving resolution to litigation, and thus capital concerns, is important.

Analysts are taking a positive view of the Eurogroup president’s earlier comments that Deutsche Bank would have to stand on its own. Connor Campbell at Spreadex said:

Despite, or perhaps because of, Jeroen Dijsselbloem coming out to state that Deutsche Bank won’t receive state aid the German giant has managed to claw its way back into the green this afternoon.

One could argue that the comments from Dijsselbloem prove that the financial health of Deutsche Bank isn’t as bad as suspected. For if it the financial firm was on its last legs there is no way the Eurozone chiefs wouldn’t find a way of preventing the collapse of the region’s biggest lender.

Deutsche Bank’s US shares are sharply higher after Thursday’s sell-off, up around 6% at the moment.

Back with Deutsche Bank and here’s the chart of its shares over the last couple of days:

Deutsche Bank shares
Deutsche Bank shares Photograph: Thomson Reuters

After briefly edging into positive territory for the day, they have slipped back again slightly. Analysts have suggested that the earlier figure of $5.4bn is a misreading of a JP Morgan note, which estimated that could be the amount Deutsche would have to pay for non-US fines, not the Department of Justice liability.

And US consumer confidence is on the rise as well.

The University of Michigan’s consumer sentiment index is up from 89.8 in August to 91.2 in September, above forecasts of a figure of 90. It is also better than the preliminary reading for September of 89.8.

Back with the US economy, and a better than expected Chicago purchasing managers index for September.

The index came in at 54.2 compared to forecasts of 52 and last month’s figure of 51.5.

Deutsche Bank’s shares have now moved into positive territory for the day:

Wall Street opens sharply higher

After Thursday’s falls, the US market is heading higher in early trading, with financial stocks recovering some ground on hopes that Deutsche Bank can emerge intact from the current crisis. Investors appear to be taking heart from the bank’s chief executive John Cryan telling staff the bank has strong fundamentals.

The Dow Jones Industrial Average is currently up 121 points or 0.67%, while the S&P 500 and Nasdaq Composite have both opened around 0.4% higher.

As we said earlier, Deutsche Bank’s position will look a lot healthier if it can agree a deal with the US Department of Justice to reduce its fine from the mooted $14bn. There is market chatter that a deal can be done, perhaps over the weekend, and at a much lower cost to the bank.

Whatever the case, Deutsche Bank’s shares continue to recover and are now down just 0.69% at €10.80.

No state aid for Deutsche Bank - Eurogroup

Jeroen Dijsselbloem, the president of the Eurogroup, has told reporters that Deutsche Bank must survive on its own, without state aid, Reuters is reporting.

A quick recap

The early morning market panic in Europe has abated.

So, with the East Coast of America heading to work (or already there), let’s quickly catch up.

Deutsche Bank’s shares have suffered fresh losses on Friday, on growing fears over the bank’s financial health.

They tumbled 8% in early trading, falling below €10 for the first time in decades, after it emerged that 10 hedge funds had cut their exposure to the bank.

But right now, Deutsche’s shares are staging a recovery, and currently 3.7% lower at €10.47.

The recovery began after Deutsche Bank CEO John Cryan wrote to the bank’s staff, to reassure them about its financial situation.

Cryan insisted that:

  1. We fulfil all current capital requirements and our restructuring is well on track.
  2. We have significantly decreased our market and credit risk in recent years.
  3. Despite low interest rates and a difficult environment we posted a pre-tax profit of about 1 billion euros in the first half of 2016.
  4. In a situation like this, the most important factor is our liquidity reserves, which are still over €215bn.

Intriguingly, Cryan signed off his note by promising staff that “You will hear back from me soon.”

Cryan has been America this week, attending a Deutsche banking conference. We understand that he’s still in the US.....

Some analysts have been arguing that Deutsche Bank’s financial position is healthier than feared, and that it has enough capital to handle the fine heading its way from the DoJ.

Credit Suisse, for example, believe the slump in Deutsche Bank’s share price is overdone.

There’s also widespread agreement that Deutsche Bank’s position will improve once that fine is agreed. That would then pave the way for fresh capital to be raised to underpin the bank.

European stock markets have recovered from their early morning slump, although bank shares are still in the red.

  • Britain’s FTSE 100 index is now down just 39 points, or 0.6% -- having been down over 100 points earlier.
  • The German DAX is now down only 0.6%,
  • while the French CAC is down 1.2%.

Mike Van Dulken of Accendo Markets says Cryan’s memo helped to reassure the City.

“Equities are nursing losses into the weekend, derived from more intense anxiety about the health of Germany’s Deutsche Bank.

Major equity indices are, nonetheless, off their worst levels courtesy of intervention by DBK’s CEO saying market anxiety is excessive, fine or no fine from the US DoJ.

Contagion fears that were denting financial peers may have eased but of course remain ready to pounce on the next negative DBK soundbite.

Wall Street is currently expected to open a little higher, in 40 minutes time, having suffered a chunky selloff last night.

Meanwhile in the UK, two pieces of economic data have provided fresh evidence that the Brexit vote hasn’t hurt the economy.

Updated

Newsflash from America: US citizens saw their incomes rise by 0.2% in August, bang in line with forecasts.

Hmmmm Deutsche Bank’s share price is picking up. Now down just 3.8% today at €10.40.

Deutsche's CoCo bond hits record low

Investors are keeping an eye on a particular type of debt, called CoCo bonds, issued by Deutsche Bank.

Also known as AT1 bonds, they are effectively insurance for Deutsche, in the event that it needs fresh capital. Investors buy them because they offer a high interest rate, but they also know that the bonds could be converted into shares if the bank hits trouble.

So it’s worth noting that Deutsche’s CoCo bonds have hit fresh lows today, showing that investors think there’s a greater danger they’ll be triggered.

But let’s be clear -- this is an example of the financial markets working as they should.

CoCo bonds are meant to be triggered when a bank needs new capital. They’re part of the framework created after the 2008 crash, to stop taxpayers being first on the hook.

Joel Lewin of fastFT has more details:

The price of Deutsche’s 6% coco has dropped below 70 cents on the euro for the first time today. Last summer it was trading above 100 cents. Coco bonds are deemed among the riskiest forms of debt. They are a form hybrid debt that converts to equity when the bank’s capital falls to a certain level.

Recent concerns over the impact of a potential fine of as much as $14bn from the US Department of Justice on Deutsche’s balance sheet have sparked fears that its coco bonds could be triggered, resulting in scrapped coupon payments or forcing parts of its debt structure to be converted to equity.

Neither the German or US governments will want to see Deutsche Bank suffer a meltdown this autumn, for political reasons.

Angela Merkel is already under extra pressure since the right-wing AfD party made gains in Berlin elections earlier this month. A bailout of Germany’s flagship bank would intensify criticism of her leadership, ahead of Federal Elections in autumn 2017.

Barack Obama can also remember what a banking crisis looks like. The final weeks of his historic battle for the White House in 2008 saw the financial system come close to meltdown, after Lehman Brothers was allowed to fail. A repeat today would not, I suspect, help Hillary Clinton’s chances in November.

Updated

Barack Obama and Angela Merkel spoke by phone yesterday, but didn’t discuss Deutsche Bank’s looming fine from the DoJ.

That’s according to a German spokeswoman, who told reporters that:

“The conversation with Obama concerned Ukraine and Syria,and was not about other issues.”

(thanks to Reuters for the quote)

Berlin’s government continues to play a straight bat on Deutsche, having denied a report this week that a secret rescue plan is being developed.

Updated

John Cryan’s claim that forces in the markets are trying to weaken confidence in Deutsche Bank has reminded some observers of another bank chief, Dick Fuld of Lehman Brothers.

Fuld notoriously told staff in 2007 that he wanted to squeeze, hard, the speculators who had shorted Lehman’s shares.

To nervous laughter, Fuld declared that:

What I really want do to is reach in, rip out their heart, and eat it before they die.

Those speculators had the last laugh though, when Lehman failed in September 2008.

John Cryan is hardly cut from the same cloth as Fuld, though. Deutsche’s British-born CEO has a reserved, almost doleful delivery in public, and could surely never give such a speech.

Updated

Deutsche Bank’s shares have taken such a hammering recently that it’s hard to say exactly when they were lower.

My Reuters terminal only has data going back to the early 1990s, and that shows that Deutsche are at their lowest since reunification. They’ve lost 90% of their value since 2007 (!)

Deutsche Bank’s shares since 1991
Deutsche Bank’s shares since 1991 Photograph: Thomson Reuters

James Mackintosh of the WSJ has done some serious digging, and shows how shares hit 1973 levels this morning.

The headquarters of Germany’s Deutsche Bank.
The headquarters of Germany’s Deutsche Bank. Photograph: Kai Pfaffenbach/Reuters

Carlo Mareels of Mitsubishi UFJ, a financial services group, reckons that the markets have over-reacted to last night’s scoop about some hedge funds cutting their prime brokerage exposure to Deutsche Bank (DB).

He says:

“It is unexpected news to us, especially because it includes 10 different hedge funds which, we understand, would have made such a decision at the same time.

DB said yesterday that its prime brokerage is ‘still very profitable’ (CNBC) and that it had outflows, but also inflows. We are not sure why this decision would have been taken by all these hedge funds given that the risk of a liquidity crisis is very remote and the Central Banks are now much more on an alert than in 2007/8.”

Mareels also argues that Deutsche Bank could handle a DoJ fine of up to $6bn.

[Anything higher] would appear excessively punitive given how other banks with larger initial settlement requests have ended up paying smaller amounts than $6bn.”

But until that fine is agreed, Deutsche Bank can’t raise fresh capital, Mareels concludes.

City traders are expecting some turbulent days, as Deutsche Bank’s problems tumble on.

Paresh Davdra, CEO and Co-Founder of RationalFX, says currencies could be knocked, including the pound (which is currently below $1.30)

The next few days will not only be crucial for Deutsche bank, but also currencies across Europe. This morning’s news has already undermined the Pound, with the improvements seen this week impacted by market concerns over Deutsche Bank.

Continued instability will put great pressure on the fragile and unpredictable pound, and investors globally will be keeping a close eye not just on the German bank but on what happens to the Pound.”

Your starter for 10....

Credit Suisse have published a research note on Deutsche Bank this morning.

On the upside, CS argue that the slump in Deutsche’s share price is an overreaction, which “overstates the short-term litigation risk” from US authorities. They are confident that the DoJ will settle for a much lower amount than the opening offer of $14bn.

But … there’s also the downside. And CS warns that Deutsche Bank needs €7bn of additional capital over the next two years, to hit its own targets. And that means its share price will remain under pressure.

Here’s the relevant bit:

A capital shortfall of nearly €7bn still exists on a fully phased basis between the 2Q16 fully phased CET1 ratio of 10.8% and the 2018 management target of 12.5% (including just 25bps buffer over the 12.25% minimum; we think investors will demand nearer 13% on a sustainable basis).

With just a 5% ROTE in 2018 in the current revenue environment, even with no dividend in 2016/2017 and benefits from recent disposals we still think Deutsche Bank will struggle to meet its capital targets organically, especially if the sale of Postbank (which could add 20-70bps at 0.3-0.6x TBV) is delayed due to a low price in a low rate environment. We think this will keep the shares trading below 0.4x 2016E TBV.

And for readers who aren’t banking experts, here’s a glossary:

  • CET1= Tier 1 common capital, a measure of financial strength
  • ROTE = Return on tangible equity, a measure of how much cash shareholders receive
  • TBV: tangible book value, or how much Deutsche Bank is actually worth (and thus what the share price will do)

Updated

Has John Cryan dropped a hint that he may have news for Deutsche’s worried staff, in today’s memo?

The New York Stock Exchange.
The New York Stock Exchange. Photograph: Drew Angerer/Getty Images

It’s early days...but it appears that the New York stock market may open calmly in three and a half hours despite the fears gripping the banking sector.

Wall Street took the brunt of the Deutsche Bank selloff last night, after Bloomberg broke the news that some hedge funds had pulled cash away from the company.

That wiped 1% off the Dow Jones industrial average last night, as Deutsche plunged to fresh lows.

Jamieson Blake, Retail Sales Manager at ADS Securities London, says the Dow is on track for a flat open:

Despite a volatile start in Europe, Wall Street is currently looking to kick off the last trading session of the quarter as good as unchanged.

There are mounting fears over the state of Deutsche Bank and with this will come concern over the risk of contagion. The VIX is spiking higher too, but at least for now the market seems content that the slide we saw for US equities yesterday has been an appropriate adjustment.

VIX is a measure of volatility, known informally as the Fear Index.

Updated

Here’s our latest news story on Deutsche Bank, for anyone just tuning in

Earlier this week, John Cryan was in Arizona for Deutsche Bank’s 24th Annual Leveraged Finance Conference.

This tweet, from two days ago, confirms it:

It’s thought that Cryan hasn’t flown back to Europe yet; if so, he has an opportunity to tackle that looming fine from the DoJ.

City editor Jill Treanor explains:

Cryan has insisted the bank will not pay the $14bn the DoJ has demanded.

Under pressure from some analysts to accelerate his restructuring programme, Cryan is understood to be in the US, which might indicate that the bank is trying to further engage with the authorities.

That John Cryan memo in full

Here’s John Cryan’s email to Deutsche Bank’s staff, reassuring them about the bank’s financial health.

I have bolded up the most important bits.

Media reports on Deutsche Bank: a message to employees from John Cryan

Dear Colleagues,

Deutsche Bank CEO John Cryan.

You will have seen speculation in the media that a few of our hedge fund clients have reduced some activities with us. That is causing unjustified concerns. We should consider this in the context of the bigger picture: Deutsche Bank overall has more than 20 million clients.
I understand if you feel concerned by the extensive coverage on this issue. Our bank has become subject to speculation. Ongoing rumours are causing significant swings in our stock price.
It is our task now to prevent distorted perception from further interrupting our daily business. Trust is the foundation of banking. Some forces in the markets are currently trying to damage this trust.
Deutsche Bank has strong fundamentals. Let me mention some of the most important facts at this point:

  1. We fulfil all current capital requirements and our restructuring is well on track. We completed the disposal of the British insurer Abbey Life this week and the sale of our stake in the Chinese Hua Xia Bank will be finalised soon. This will further improve our capital ratio.
  2. We have significantly decreased our market and credit risk in recent years. At no point in the last two decades has the balance sheet of Deutsche Bank been as stable as it is today.
  3. Despite low interest rates and a difficult environment we posted a pre-tax profit of about 1 billion euros in the first half of 2016. Before extraordinary items like restructuring costs, we earned about 1.7 billion euros. This demonstrates the operating strength of Deutsche Bank.
  4. In a situation like this, the most important factor is our liquidity reserves. Currently they still amount to more than 215 billion euros. This is an extremely comfortable buffer. This is clear proof of how conservatively we have planned. This is acknowledged by numerous banking analysts.

There is therefore no basis for this speculation. Nor can uncertainty about the outcome of our litigation cases in the US explain this pressure on our stock price, if we take the settlements of our peers as a benchmark.
You have all done a tremendous job over the past few days. You are the ones who are in constant contact with our clients and making it clear how Deutsche Bank is really doing. You are Deutsche Bank – that is impressively clear. All of us in the Management Board highly appreciate it.
You will hear back from me soon. Please keep working as you have been doing so far. We are and we remain a strong Deutsche Bank.
Yours sincerely,

Updated

Deutsche Bank shares recover some early losses

A statue is pictured next to the logo of Germany’s Deutsche Bank in Frankfurt, Germany, today.
A statue is pictured next to the logo of Germany’s Deutsche Bank in Frankfurt, Germany, today. Photograph: Kai Pfaffenbach/Reuters

Let’s get back to Deutsche Bank.

And shares in Germany’s largest lender have recovered some of their earlier losses, after CEO John Cryan told staff that the bank is still in solid shape.

In that memo, Cryan also said (via Reuters):

“We should look at the complete picture.

“Deutsche Bank has more than 20 million customers.

“We are and remain a strong Deutsche Bank.”

And this seems to have helped restore some confidence.

Deutsche’s shares are now down ‘only’ 4% this morning, at €10.42, having been driven into single digits earlier. That still leaves them on track for a new record closing low.

Other bank stocks have recouped some ground too, but are still in the red.

Joshua Mahony of City firm IG says the threat of US litigation for misconduct is haunting the sector.

Market sentiment continues to suffer as a result of recent Deutsche Bank woes, with the financial sector leading the race to the bottom this morning.

With the US Department of Justice aiming to also penalise Barclays and Credit Suisse alongside Deutsche [details here], there is a fear that we could see huge amounts of fines levied across the whole industry, effectively wiping out much of the safety buffers built up in case of emergency.

Hammond: UK still has economic strength

The Rt Hon Philip Hammond MP Chancellor of the Exchequer.
The Rt Hon Philip Hammond. Photograph: Steve Back / Barcroft Images

Chancellor Philip Hammond has welcomed the news that Britain’s service sector grew at a faster pace in July (up from +0.3% to +0.4%), and that Q2’s growth rate has been revised up (from 0.6% to 0.7%)

Hammond says:

“The UK started the year in a position of economic strength, and we can see today that this momentum has continued in the services sector – the largest part of our economy.

We want to build on this strength as we forge a new relationship with the EU and deliver an economy that works for all. The UK is well-positioned to deal with the challenges, and take advantage of the opportunities, that lie ahead.”

Hammond, who took office after the referendum, is currently working on his autumn statement (due on 23 November). He must decide how much extra stimulus the UK economy needs, following the Brexit vote.

Updated

Inflation across the eurozone has doubled, from 0.2% to 04% in September.

Eurostat reports that energy costs were less of a drag on the cost of living, as the oil prices has picked up recently.

That suggests that inflation is finally heading up towards the official target of just below 2%, following massive stimulus efforts from the European Central Bank.

Here’s the details:

  • Service sector inflation rose to 1.2%, up from 1.1% in August
  • Food, alcohol & tobacco prices rose by 0.7%, compared with 1.3% in August
  • non-energy industrial goods rose by 0.3%, having been flat in August
  • And energy prices only shrank by 3.0%, compared with -5.6% in August.
eurozone GDP

Updated

Economist Sam Tombs reckons the Bank of England now has less reason to cut interest rates again:

UK shakes off Brexit vote: what the experts say

City experts are hailing this morning’s UK data, and the latest signs that the Brexit vote hasn’t derailed the economy.

Alan Clarke of Scotiabank says the surge in service sector growth in July is significant:

Representing around ¾ of the economy, this was the first official output data for the sector to cover the post Brexit vote period. Services grew by 0.4% m/m, well above consensus, with the prior month also revised up for good measure.

So despite the Brexit vote and the anxiety surrounding it, it was business as usual in the services sector.

Howard Archer of IHS Global Insight agrees. He’s revised up his forecast for growth in the third quarter of 2016:

News that services output grew 0.4% month-on-month in July in the immediate aftermath of the Brexit vote is a significant boost to third quarter growth prospects; consequently we are lifting our third quarter growth estimate to 0.4% quarter-on-quarter from 0.3%.

Sky News’s Ed Conway is also impressed by the services sector growth:

Economist Rupert Seggins puts the 1% jump in business investment into context:

Updated

ONS: No sign of a Brexit shock as services sector grows strongly

In further good news, Britain’s services sector output grew by 0.4% in July, up from 0.3% in June.

That suggests that the UK economy was not rocked badly by the results of June’s referendum, as well as growing strongly in the run-up to the vote.

How the UK service sector fared in July
How the UK service sector fared in July Photograph: ONS

Darren Morgan, head of GDP at the Office for National Statistics, says today’s data (online here) shows the UK services sector is in better shape than feared.

“Despite some very weak indicators appearing in the immediate aftermath of the referendum, estimates gathered by ONS from more than 23,000 firms now suggest that the services sector – which accounts for three quarters of the economy – in fact grew strongly in July.

“Further information also suggests that the whole economy also grew slightly more strongly in the months before polling day than previously thought.”

“Together this fresh data tends to support the view that there has been no sign of an immediate shock to the economy, although the full picture will continue to emerge.

“ONS is also developing new sources of data so as to provide a faster and more complete picture of the economy as the Brexit story unfolds over the longer term.”

UK growth rate revised up to 0.7%

Newsflash from London: Britain’s economy performed better in the run-up to June’s EU referendum than first thought.

UK GDP grew by 0.7% in the second quarter of 2016, the Office for National Statistics says, up from a previous estimate of 0.6%.

These new figures show that:

  • the services industry grew by 0.7%, not 0.6% as first thought
  • Industrial production growth is confirmed at 2.1%,
  • The construction sector only shrank by 0.1%, not 0.7%

The ONS also reports that business investment grew by 1% during the quarter, despite the apparent uncertainty over the Brexit vote.

It’s the latest sign that the economy held up pretty well in the run-up to the 23 June referendum ....

UK GDP over the last decade
UK GDP over the last decade Photograph: ONS

Updated

Deutsche Bank’s share prices has climbed back over the €10 mark, after John Cryan’s memo to staff was published.

But it’s still down almost 7% at €10.11.

Updated

Reuters have now translated John Cryan’s memo into English.

Here’s the key quote from the Deutsche Bank boss, blaming market speculation for undermining the company:

“There are forces now under way in the market that want to weaken confidence in us,

Our job now is to ensure that this distorted perception does not more strongly influence our day-to-day business.”

Deutsche CEO blames 'market forces' for share slump

CEO John Cryan.
CEO John Cryan. Photograph: Michael Gottschalk/Photothek via Getty Images

Newsflash: John Cryan, the chief executive of Deutsche Bank, has written a memo to staff insisting that the company has a strong foundation, and hitting out at speculators.

It is an attempt to quash concerns over Deutsche’s future, and shore up confidence in Germany’s largest lender.

Reuters has the memo.

It says that Cryan says that “market forces” are in action, and that there is “no basis” for speculation over Deutsche’s health.

He says the bank fulfils all capital requirements, and a strong foundation.

He also says that the uncertainty over the upcoming fine from the Department of Justice does not justify the fall in Deutsche’s share price, given the final settlements that have been agreed by rivals.

Updated

Deutsche Bank’s problems would be less severe if it could reach a settlement with the US Department of Justice over the mis-selling of toxic mortgage securities a decade ago.

Deutsche has been under pressure since it emerged that the DoJ has proposed a $14bn penalty – much more than expected, and dwarfing the $6bn which the bank had set aside for misconduct.

Most analysts expect the DoJ to settle on a lower figure. but until that happens no-one knows how much extra capital Deutsche Bank needs to raise.

The Financial Times is reporting that the DoJ is planning a multibillion-dollar “omnibus settlement” with Barclays, Credit Suisse and Deutsche Bank for mis-selling mortgage-backed securities, in the next few weeks.

They say:

By grouping the three banks together into a single deal the DoJ hopes to achieve maximum public impact by collecting an eye-catching sum in penalties from the trio just weeks before the US presidential election.

More here: US seeks pre-election settlement of bank mis-selling claims

Updated

Every one of Europe’s financial stocks is falling this morning, as Deutsche Bank’s problems rattle the sector.

Bank stocks today
The worst-performing banking stocks this morning Photograph: Thomson Reuters

Conner Campbell of SpreadEx sums up the mood:

After a couple of days of relief the markets are back in the red, with Deutsche Bank continuing to position itself as the number one worry for investors.

A Bloomberg report yesterday evening claiming that 10 hedge funds had reduced their exposure to the German financial firm has sparked the latest round of heavy losses, with Deutsche Bank dropping between 9% after the bell. That drop has seen the bank dip below €10, effectively its worst price in 30 years.

Understandably the European markets are rattled. The FTSE has now lost all of the 2016-high grazing growth it managed yesterday, falling back below 6850 in part thanks to the near 5% declines seen by Barclays and RBS (the latter of which is perhaps most in line for a Deutsche Bank style shock).

The DAX, meanwhile, dropped by nearly 200 points, with the CAC the worst performing major index at a 2.1% slide thanks to the heavy losses incurred by BNP Paribas, Credit Agricole and Societe Generale.

Analyst Marc Ostwald of ADM Investor Services agrees that Deutsche Bank isn’t the new Lehman:

The Deutsche Bank, and broader European banking concerns will also remain ‘front and central’ to proceedings, though the specific comparisons to Lehman look to be off target, in so far as Deutsche is a huge deposit taker (close to €600 Bln), is very clearly too big to fail, and has access to all the ECB funding facilities that have been established since the GFC [Great Financial Crisis].

But he believes Deutsche Bank needs to bite the bullet and do something...

As with Lehman, the key issue is far less its under-capitalization or solvency, and rather more the potential loss of access to liquidity.

Doing nothing is eminently no longer an option, and per se it needs to consider one or more of the following difficult options:

a) raise equity other via a rights issue or converting CoCos [bonds that convert to equity when a bank needs capital]

b) go with a begging bowl to the ECB, an option that remains heavily stigmatized,

c) opt for a bail-in, or

d) seek a government bail-out.

Deutsche Bank’s struggles may sound like a repeat of the Lehman Brothers collapse, but there are some key differences.

For one, Deutsche can approach the European Central Bank for liquidity if it struggles (which would be embarrassing for such a large lender).

New bail-in rules mean it can tap bond-holders, before needing a state bailout.

And Angela Merkel could, if needed, step in if a ‘bail-in’ didn’t raise enough capital.

Deutsche Bank shares hit single digits

Ouch! Deutsche Bank’s share price just slipped below the €10 mark for the first time in around 30 years.

Germany’s DAX stock index has shed 1.6% in early trading, led by bank stocks, and France’s CAC is down by 1.7%.

Almost every share has fallen in London this morning; the only risers are precious metals producers Randgold and Fresnillo.

Financial stocks are being badly rattled by the situation at Deutsche:

Top fallers on the FTSE 100
Top fallers on the FTSE 100 Photograph: Thomson Reuters

Deutsche Bank shares fall 7%

Shares in Deutsche Bank have slumped by 7% at the start of trading in Frankfurt.

They hit a low of €10.07, the lowest since the mid-1980s, echoing last night’s selloff in New York.

Deutsche Bank’s share price today

Commerzbank, Germany’s second largest lender, are down 6% at the open. Yesterday it announced 9,600 job cuts and a dividend freeze, as it tried to shore up its own profitability.

Updated

FTSE 100 drops at the open

London’s stock market is bathed in red at the start of trading, as Deutsche Bank fears ripple through the City.

The FTSE 100 index has shed 89 points, or 1.3%, to 6830.

Banks are leading the selloff; Lloyds Banking Group, Barclays and Royal Bank of Scotland are all down around 3.5%.

Worries over Deutsche Bank rippled through Asia’s stock markets overnight.

The Japanese Nikkei dropped by 1.5%, as investors digested the news that 10 hedge funds (out of 200) had cut their exposure to Deutsche.

Michael Hewson of CMC Markets says:

While these firms represent a fairly small part of the banks clients, as a weather vane in the current febrile environment, it doesn’t exactly represent a vote of confidence either, and sent the US listed shares of the bank to a record low.

Asian stock markets today
Asian stock markets today Photograph: Thomson Reuters

Updated

Introduction: Deutsche Bank fears hit the markets

A vintage clock with the logo of Deutsche Bank is pictured outside the bank’s branch in Wiesbaden, Germany.
A vintage clock with the logo of Deutsche Bank is pictured outside the bank’s branch in Wiesbaden, Germany. Photograph: Kai Pfaffenbach/Reuters

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

When does a problem turn into a crisis?

For Deutsche Bank, that moment may have come last night, when Bloomberg reported that 10 hedge funds had cut their exposure to the German lender.

These funds, who use Deutsche Bank to clear various trades, have chosen to move some excess cash elsewhere, in light of recent speculation over Germany’s largest lender’s financial health.

Although most of Deutsche’s clients haven’t taken any action, the news still rattled Wall Street.

Deutsche Bank’s US-listed securities tumbled by 6.6% in New York last night, as the Dow Jones industrial average shed 1%, or 197 points.

Its Frankfurt-listed shares are likely to slide when trading begins, and may drag down the wider European stock markets as well.

As Rupert Neate reported last night, Deutsche Bank tried to reassure the markets:

The report forced the chairman of Deutsche’s hedge fund business, Barry Bausano, to take to the airwaves to reassure the market. He told CNBC that Deutsche, its prime brokerage division, which services hedge funds, was “still very profitable” but said there was “no question we have a perception issue”.

Deutsche, which has had been quick to deny reports it needed help from the German government, released a statement on Thursday to reassure investors that the majority of its clients were sticking with the bank.

“Our trading clients are among the world’s most sophisticated investors. We are confident that the vast majority of them have a full understanding of our stable financial position, the current macroeconomic environment, the litigation process in the US and the progress we are making with our strategy,” the bank said.

It’s important not to sensationalise the situation at Deutsche Bank; many banking analysts insist that this isn’t another Lehman moment.

The bank doesn’t need fresh capital today, and could probably raise it if needed -- partly by triggering a particular kind of bond, called CoCos, which are designed for such eventualities.

But the bank does risk losing confidence, as it fights to reach a settlement with US authorities for financial misconduct. The threat of a large fine from the US Department of Justice is unnerving some investor, with the DoJ suggesting $14bn - compared to Deutsche Bank’s provision of just $6.1bn....

We’ll be tracking all the main events through the day...

Updated

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