And finally.... there’s no let- up on the anxiety in the banking sector this afternoon.
Deutsche Bank shares are hitting new lows, down almost 9% in late trading, in its worst day since Britain voted to leave the EU.
Jasper Lawler of CMC Markets explains:
“The decline in DB shares was the biggest since the day after the Brexit vote. The fine would be to settle an investigation into the mis-selling of US mortgage backed securities.
The $14bn would be about 80% of Deutsche Bank’s market cap and may dissuade employees from following CEO John Cryan’s recent advice to “be more daring.”
Royal Bank of Scotland has shed 5% – pushed down by fears that it could incur a whopping fine from the DoJ too (as explained this morning).
Many other European banks have shed two or three percent, in a new bout of jitteriness about the banking sector.
Deutsche Bank -8.8%
— Bloomberg (@business) September 16, 2016
Credit Suisse -5.2%
RBS -4.5%
UBS -2.9%
Barclays -2.8%
Latest update: https://t.co/rWZTgW9Urq pic.twitter.com/qybyq9uMT8
That’s all for today, and indeed this week. Have a good weekend, and see you on Monday! GW
Grexit is no more!!
Wall Street firm Citi has told clients today that it no longer thinks Greece will leave the eurozone in the next three years. Despite the latest tensions between Athens and its creditors, they reckon its bailout programme will remain intact.
GREXIT NO MORE. Citi no longer thinks Greece will exit the eurozone, after years of predicting it will happen. pic.twitter.com/ZHS5Wlpa1C
— Robin Wigglesworth (@RobinWigg) September 16, 2016
Readers may remember that Citi actually dreamed up the term Grexit in 2012, when chief economist William Buiter said there was a 90% chance the country would leave the eurozone.
That prediction proved incorrect; will today’s recantation come back to bite them?
@RobinWigg uh oh
— Matthew C. Klein (@M_C_Klein) September 16, 2016
Handelsblatt: $14bn fine would be 'minor catastrophe' for Deutsche
The German newspaper Handelsblatt describes the proposed $14bn settlement as a “cold shower” for Deutsche Bank.
“Such a large sum would amount to a minor catastrophe: if the bank had to raise the fine out of its capital, it would shrink its equity ratio to single digits, perhaps eight percent.
For a bank of this calibre and complexity, this would be unacceptable and would practically force a capital increase”
Standard & Poor’s has a glimmer of good news for Deutsche Bank - it isn’t planning to downgrade its credit rating, despite the threat of a $14bn settlement with the DoJ.
S&P currently rates Deutsche Bank as BBB+ with a negative outlook, and says this is “not immediately affected by reports that it is negotiating a settlement with the U.S. Department of Justice”.
S&P also expects that Deutsche will end up paying more than it has currently set aside to cover litigation costs, even if it avoids the full $14bn bill.
Deutsche Bank held €5.5 billion of litigation reserves on June 30, 2016, and identified a further €1.7 billion of unreserved contingent litigation liabilities. The latter are defined as obligations that can be estimated and where a loss is considered less than probable, but more than remote.
Our capital and earnings forecasts anticipate the crystallization of this contingent liability, with additional charges on top.
The Brexit vote is cast a shadow over London Fashion Week, where top designers fear being frozen out of the European market.
Caroline Rush, chief executive of the British Fashion Council, says its “vitally important” that Britain maintains access to the single market.
Rush says:
“We need to ensure that our changing relationship with the EU will not impact on the creativity of London, our access to new talent overseas or the ongoing education and training programmes we support.”
The EU referendum has delivered some benefits to the industry, though - sales to tourists should rise thanks to the weak pound.
Updated
The US Federal Reserve is still unlikely to raise rates at its meeting next week, despite this pickup in inflation.
But FXTM research analyst Lukman Otunuga reckons the Fed could easily hike in December:
Dollar bulls were offered a lifeline on Friday following the impressive US inflation data which rekindled optimism over the Federal Reserve raising US rates this year. CPI for August printed at 0.2% while Core CPI ticked higher at +0.3% simply elevating sentiment towards the US economy.
With inflationary pressures building up gradually in the world’s largest economy, the Fed may have been provided a compelling reason to act before year end. Although expectations have withered over September being a live meeting to pull the trigger, the hope of December being a possibility to act could keep the Dollar buoyed.
The US dollar is strengthening following the rise in US inflation, as investors calculate that it makes interest rate rises a little more likely.
This means the pound has now lost a whole cent, to $1.313.
And the euro has lost half a cent, to $1.118.
“Disaster Economy” produces Core CPI up 2.3% year-over-year, fastest pace in 8 years.
— Downtown Josh Brown (@ReformedBroker) September 16, 2016
¯\_(ツ)_/¯
US inflation beats forecasts
Just in: America’s inflation rate has risen by more than expected, reigniting the debate on whether US interest rates should rise.
Consumer prices rose by 0.2% month-on-month in August, higher than the 0.1% economists expected. That’s also an increase on July, when prices were unchanged during the month.
Although fuel prices fell, rents and healthcare costs pushed up the cost of living.
The annual rate of inflation also picked up, giving ammunition to those who think the Federal Reserve should raise interest rates.
On an annual basis, prices rose by 1.1% last month - up from 0.8% in July. And core inflation, which strips out volatile elements like fuel and food, rose to 2.3%.
US Consumer Price Index rose 0.2% in Aug vs. 0.1% increase expected https://t.co/hZkVTuzr9I
— CNBC Now (@CNBCnow) September 16, 2016
*U.S. AUGUST CONSUMER PRICES RISE 0.2%; CORE RATE RISES 0.3%
— lemasabachthani (@lemasabachthani) September 16, 2016
Updated
The German government has now weighed in over the Deutsche Bank issue, saying it expects its largest bank to be treated “fairly” by US authorities.
Finance Ministry spokeswoman Friederike von Tiesenhausen also flagged up that the settlement process isn’t over, even though the DoJ want Deutsche to pay a $14bn settlement.
She told reporters that:
“The government is aware that the U.S. authorities have agreed similar settlement payments with other credit institutions.
The government expects that at the end of this process a fair result will be achieved on the basis of equal treatment.
(thanks to Reuters for the quote)
Meanwhile Deutsche executives have been trying to reassure investors that it won’t be forced to raise fresh capital:
#DeutscheBank Head of Comms:We have a comfortable capital cushion. No need to raise capital. No plans for fire sales
— Carolin Roth (@CarolinCNBC) September 16, 2016
Updated
Pound dips
While Mark Carney was being quizzed about Brexit, Scotland and Skepta, the pound was losing ground in the foreign exchange market.
Sterling has lost around 0.5% this morning, to $1.317 against the US dollar. It’s on track for its worst week in over a month.
It’s tempting to suggest that the markets have lost faith in Mark Carney’s authority, now he’s been outvoted over his household pet.
But instead, fellow Bank policymaker Kristin Forbes has done the damage. She’s told a conference in Paris that a weak pound should help fix Britain’s current account deficit.
Forbes said (via Reuters):
“Sterling’s depreciation should improve the UK’s net foreign asset position by over 20 percent of GDP. That’s a big improvement in the UK’s net international asset position and that should alleviate concerns by international investors about the UK’s ability to pay on its net foreign asset position.”
Newsflash from Moscow: Russia’s central bank has cut interest rates in an attempt to stimulate its economy.
Borrowing costs have been slashed from 10.5% to 10%, with the central bank citing “the inflation slowdown...decrease in inflation expectations and unstable economic activity.”
It’s the second Russia rate cut this year, as the central bank tries to nurse the economy back to health without weakening the rouble.
Bank of England governor outvoted ! (over household pet)
Mark ‘Carnage’ Carney’s grilling at Whitley Academy in Coventry concludes with a few quick-fire questions.
Q: What’s your dream job?
Ice-hockey goalie in the NHL.
Q: What TV programme is your guilty pleasure?
Bake-Off (Bet he’s cross about Mel and Sue leaving)
Q: Most expensive luxury you’ve ever bought?
Carney can’t think of one.
Q: What’s your favourite film?
Gallipoli.
Q: Favourite food?
Pizza.
Q: How much money do you have on you right now?
I’ve got a new five pound note, says the Governor proudly, plus £40 in my bag.
Q: Spender or saver?
At the moment, Saver, says Carney, after a nanosecond’s pause
Q: Cats or dogs?
Dogs, but I have a cat <cue laughing in the audience>. It’s because I’m outvoted in the household, Carney explains.
Q: Football or ice hockey?
Football - because it’s important to understand the personalities in sport.
And finally, a popular music question:
Q: Skepta or Craig David?
The governor looks baffled.
Mark Carney couldnt decide on whether he preferred Skepta or Craig David. He said he prefers The Specials. #bbcschoolreport
— Joe Lynam BBC Biz (@BBC_Joe_Lynam) September 16, 2016
Classic stuff. You can watch a replay here (scroll back to 10.18am)
Updated
Another ace question for Mark Carney, from schoolboy Jay:
Q: Who is easier to work with, David Cameron or Theresa May?
Carney diplomatically ducks this poser, though, saying:
They’ve both very professional, very easy to work with, and focused on making the country better.
Q: Could Scotland still use the pound if it becomes independent?
Carney says there would need to be some fiscal sharing between governments.
You can’t be fully independent and have a stable currency union.
Carney: Canada will be UK's best trading ally after Brexit.
The children in Coventry are asking Mark Carney some excellent questions, with many focusing on the EU referendum.
Carney says his toughest day on the job was the night of the Brexit vote, and the morning afterwards.
Q: How did you become aware of the Brexit result, and what was your first thought?
Carney says he had a two-hour nap, and then activated the Bank’s Brexit plan once the results showed that the Leave campaign had won.
Carney says:
My reaction was to make sure that the big fat plan that we had in place was being activated - and that everyone was doing what they should do.
He also gave more thought to what he’d say to the nation at 8am.
Q: Which countries outside the EU will be Britain’s best trade allies after Brexit?
Carney says he’s confident that many countries will want to have deeper trade relationships with the UK, which has a lot of strong exporters.
Pressed on which country would be best - he plumps for Canada, his homeland.
Updated
Carney is then asked, by Caitlin, what advice he’d give his younger self.
And the governor says he should have shown better financial discipline in his youth - saving more money and investing it in equity funds (not just into a savings account).
He says he didn’t always shop around for the best deals on mortgages and loan.
Updated
Mark 'Carnage' Carney
A classic moment, as Mark Carney reveals that one of his childhood nicknames was “carnage”.
That’ll be handy, the next time we have heavy losses in the financial markets.
Mark "Carnage" Carney. That one could stick.... https://t.co/3bJJII4u9z
— Graham Ruddick (@GrahamtRuddick) September 16, 2016
Q: What’s the best and worst part of your job?
Carney says the best part is events like today’s - meeting schools and businesses around the country.
The overseas travel is the toughest part -- he spends one in three weekends away at international events. But no-one should feel sorry for him, he adds.
Q: If you could spend all the UK’s money on anything, what would you buy?
Carney says he’d buy a few things (launching a little lecture into the ‘diminishing marginal utility’ law).
He picks lot of Dairy Milk chocolate, football tickets to Everton, and lots of music, old records.
Carney: "I would spend the country's money on Dairy Milks."
— Katie Martin (@katie_martin_fx) September 16, 2016
From the audience, Amy says it’s a ‘very good decision’.
Updated
Mark Carney grilled by schoolchildren
Mark Carney, governor of the Bank of England, is facing a grilling from schoolchildren in Coventry now.
He’s tried to butter them up, by promising a new plastic £5 to anyone who asks a nice question.
Blimey, Mark Carney just offered a new £5 note to every school child who asked him a nice question at an event. Make it rain Mark!
— Thomas Bridge (@tombridge89) September 16, 2016
BREAKING: Helicopter money begins https://t.co/zONBbv3BCV
— Stephen Kinsella (@stephenkinsella) September 16, 2016
But his audience won’t be bought off easily.
Spencer asks the governor to account for his ultraloose monetary policy, asking:
Q: Why should we save money in a bank when interest rate are so low?
Carney explains that people put money aside for a ‘big purchase’, such as a Wii console or a bike. Banks are a secure place to place money.
And the Bank is also trying to give people incentives to spend, or invest in riskier assets.
It’s live on BBC News now....
Updated
Financial commentator Frances Coppola reckons that the DoJ may be unwilling to lower Deutsche Bank’s proposed $14bn settlement, based on recent history.
She reminds us that Bank of America has to pay $16.6bn in August 2014, to settle its own history of packaging up toxic loans and selling them onto investors.
More I look at this, the less convinced I am that the DOJ will be in any mood to reduce DB's fine much. BAML paid $3bn more.
— (((FrancesCoppola))) (@Frances_Coppola) September 16, 2016
Banking analyst Tomas Kinmonth of ABN Amro is concerned that Deutsche Bank could end up defaulting on certain bonds.
Those ‘convertible capital’, or CoCo, bonds, are designed as a safety net for banks - and will convert into equity if a bank cannot pay the interest (or coupon) on the debt.
They’re also known as additional tier 1 capital (AT1 bonds).
According to Kinmonth, Deutche is close to the ‘trigger point’ on its AT1s, when it doesn’t have enough capital to repay investors. A big fine could push it over the line.
He says:
Not only are clouds over their profitability still above them, but the fine announcement will come as very unwanted news indeed. Financial statements show that Deutsche Bank has a distance to the MDA trigger at the end of Q2 was 1.40%, which equates to €5.65bn.
These values indicate that DB AT1 coupon payments could be at real risk, if the fine is over €11bn. This is because the company has provisions set aside for litigation costs at €5.5bn. However, the ADI values will be a focus now for the bank. DB reported for 2016 an AT1 payment capacity of €1.1bn for the year. This was sufficient to pay the €350mn of AT1 coupons on 30 April 2016, however the capacity for DB to make payments can come under threat from this fine.
The FT reports that Deutsche Bank’s CoCo bonds are falling in value this morning, suggesting the City believes they are riskier.
Yields on riskiest Deutsche Bank ‘CoCo’ bonds pick up https://t.co/qFU7Fb7RfB
— fastFT (@fastFT) September 16, 2016
Updated
Hat-tip to the Wall Street Journal for breaking the Deutsche Bank story last night:
They wrote:
The U.S. Justice Department proposed that Deutsche Bank AG pay $14 billion to settle a set of high-profile mortgage-securities probes stemming from the financial crisis, according to people familiar with the matter, a number that would rank among the largest of what other banks have paid to resolve similar claims and is well above what investors have been expecting.
The figure is described by people close to the negotiations between Deutsche Bank and the government as preliminary, and they said it came up in discussions between the bank and government lawyers in recent days. It hasn’t been previously disclosed. Deutsche Bank is expected to push back strongly against it, the people said, and it is far from clear what the final outcome will be.
Here's that great Deutsche scoop driving European stocks today: https://t.co/4EegCv1Fu1 via @jennystrasburg
— Chris Whittall (@Chris_Whittall) September 16, 2016
Neil Wilson, markets analyst at ETX Capital, is also concerned that Royal Bank of Scotland could face a stinging fine from the US authorities:
RBS could have to pay up to $13bn to settle the claims. Even a third of this figure which deliver a crippling blow to the lender, making its return to profitability even further off. It would also derail plans to return the bank to private ownership any time soon.
After its latest loss, RBS has notched up £50bn in losses since the financial crisis – more than the £45bn stumped up by taxpayers to save the bank.
Updated
The cost of insuring against Deutsche Bank defaulting on its bonds has risen this morning, as investors fret about its ability to pay billions to the DoJ:
Deutsche Bank 5y default probability jumps to 15.8% amid US legal dispute. pic.twitter.com/7NRQZZVxX6
— Holger Zschaepitz (@Schuldensuehner) September 16, 2016
Naeem Aslam, chief market analyst at Think Market, says the size of Deutsche’s fine has shocked investors, sparking today’s rout.
This claim has not appeared out of blue, it was expected, but the number is nearly four-fold higher what analysts were anticipating and this is putting the company’s share under immense pressure.
He also fears that US authorities could come down hard on other banks:
But our concern is that this could be just a start and other European banks could face a similar fate and this why investors are leaving the boat with respect to the banking sector.
If the Department of Justice will negotiate the number, that is a different question, because both Bank of America and Goldman Sachs have paid very hefty fines.
Almost $1.5bn has been knocked off Deutsche Bank’s market capitalisation (or value) this morning.
That means the bank is only valued at below $19bn, worryingly close to the $14bn which the DoJ wants to fine it.
That may actually strengthen Deutsche’s hand as it tried to negotiate a smaller penalty from the US authorities.
Dominic Elliott of Reuters reckons Deutsche could only manage a $7.5bn bill.
.@DeutscheBank frailty may help it bargain with US government. $7.5 bln fine doable but not much more @Breakingviews https://t.co/iiRw6gVmx1
— Dominic Elliott (@DominicElliott) September 16, 2016
It’s turning into a bad morning for the banks....
Banks today https://t.co/jlL8lXPlTM
— Bloomberg (@business) September 16, 2016
Deutsche Bank -7%
Credit Suisse -4%
RBS -4%
UBS -2%
Barclays -2%
HSBC -0.4% pic.twitter.com/pXndEDlpeX
This is why RBS shares are sliding today
Royal Bank of Scotland has been caught up the prospects of a hefty fine on Deutsche Bank for mis-selling mortgage bonds in the run up to the banking crisis.
Its shares have fallen almost 4% to 187p, well below the 502p at which taxpayers break even on the stake they acquired bailing RBS out in 2008.
The 73% taxpayer owned bank has been warning for two years that it faces penalties over so-called RMBS - residential mortgage backed securities - and only this week its finance director Ewen Stevenson was telling analysts that it might well need to take extra provisions.
Analysts estimates for scale of the charges range from £4bn to £9bn. While RBS had hoped to have agreed a deal with the US authorities last year, talks are not now expected until 2017.
So far RBS has taken a $5.6bn provision to deal with RMBS but the bulk of this is to deal with the FHFA regulator and the not the department of justice which has now turned its sights on Deutsche,
The timing of the Deutsche Bank fine is fascinating.
For a start, it mark the eight anniversary of Lehman Brothers’ collapse - the iconic symbol of the financial crisis.
It also follows the huge tax bill which the EU slapped on Apple in August, enraging the US establishment.
As the Financial Times puts it:
Coming only days after the EU stirred up angry reactions from US politicians by ordering Apple to pay €13bn of back taxes in Ireland, there is a strong suspicion in financial circles that Deutsche could be the victim of the US taking revenge on Europe.
"You tax Apple €13bn, we'll fine DB $14bn..." https://t.co/jAWNYKSEah
— Owen Callan (@OwenCallan) September 16, 2016
Bank shares are falling...
Banking shares across Europe are being thumped, as investors are spooked by Deutsche Bank’s $14bn fine.
Deutsche Bank are leading the rout, slumping by 8% to €12.06 as a wave of selling grips the Frankfurt exchange.
Deutsche Bank tanks (technical term..!) as says won't pay $14b US wants to settle RMBS investigation. Says too much. Bank stocks trade lower
— Caroline Hyde (@CarolineHydeTV) September 16, 2016
But the damage doesn’t stop there. The news that the DoJ is taking such a hard line with Deutsche has hit the whole sector.
In London, Royal Bank of Scotland has shed almost 4%, making it the worst-performing member of the FTSE 100. RBS is currently being investigated by the DoJ over its mortgage-backed securities business - the same area that got Deutsche into such trouble....
Standard Chartered, Barclays and Lloyds are also suffering....
Updated
The agenda: Deutsche Bank rocked by $14bn fine
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
Shakespeare once reminded us that:
When sorrows come, they come not single spies, but in battalions.
And the Bard of Avon would have made a decent banking analyst. Because Deutsche Bank is facing another serious problem today – a massive $14bn fine for mis-selling mortgage-backed financial products in the US in the run-up to the 2008 crisis.
Shares in Deutche Bank have plunged by 8% in early trading in Frankfurt, after it emerged overnight that the Department of Justice wants to impose the $14bn penalty.
DEUTSCHE BANK -7.80%
— lemasabachthani (@lemasabachthani) September 16, 2016
This would be one of the biggest fines ever levied on a bank, exceed the $13bn which JP Morgan paid in 2013 to settle allegations that it misled investors.
Deutsche is fighting back, saying this morning that it hopes to haggle the DoJ down.
In a statement, the bank declared:
“Deutsche Bank has no intent to settle these potential civil claims anywhere near the number cited.”
“The negotiations are only just beginning. The bank expects that they will lead to an outcome similar to those of peer banks which have settled at materially lower amounts.”
Deutsche Bank already had enough headaches.
Record low eurozone interest rates are eating into its profitability, some analysts think it needs more capital, and any Brexit-related downturn could trigger more bad debts.
Also coming up today...
It’s a quietish Friday, but we do get the latest US inflation figures at 1.30pm BST.
That could shed new light on whether America’s central bank might raise interest rates soon (just as the Bank of England moves towards cutting borrowing costs to fresh record lows).
Britain’s MPs are expected to launch a new crackdown on bosses pay:
Exclusive: MPs to launch probe into FTSE chiefs' pay, governance tomorrow ahead of crackdown pledged by Theresa May. https://t.co/lp4CKRVNaY
— Mark Kleinman (@MarkKleinmanSky) September 15, 2016
And a major row is brewing in Greece. Last night, investigators raided the home of the country’s central bank governor, Yannis Stournaras, and his wife’s company, in a corruption probe.
Coincidentally (or perhaps not?), the Bank of Greece has just rejected the government’s proposed candidates to run Attica Bank, a state-backed lender.
Prosecutor raids business of #Greece's central banker's wife in corruption probe https://t.co/zWeXZa5RHy via @WSJ @SteliosBouras1
— Nektaria Stamouli (@nstamouli) September 15, 2016
We’ll be tracking all the main events through the day...
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