As we move into the final quarter of the year, traders will be looking for Q4 to be somewhat more interesting that a rather subdued Q3. With the problems at Deutsche Bank causing swings in sentiment, markets will begin to now look seriously at the increasing importance of the implications of potential outcomes of the US Presidential Election and how it will affect risk appetite.
Deutsche Bank (DB) CEO John Cryan has claimed in a memo to DB staff that liquidity is not a problem at the bank, which remains well capitalised. However, a $14bn fine issued by the Department of Justice looms large and needs renegotiating lower otherwise the bank will need to be re-capitalised. There clearly is a problem with hedge funds which are by all accounts talking their own book resulting in Credit Default Swaps soaring. With Angela Merkel facing re-election next year amidst accusations of being soft on immigration, she cannot appear hypocritical to her stance on Greece, so this could not come at a worse time. The prospect of bailing out DB is the last thing she would have wanted but can Merkel really stand aside if one of Europe’s biggest banks slips towards bankruptcy? With European banks hardly the flavour of the month anyway, contagion is a problem. However, unless the situation at DB spirals out of control this should not cause a market meltdown. For that, perhaps we have to wait another five weeks for the Presidential Election. The first debate went to Clinton, but as Al Gore will attest to in 2000, winning the debates is not everything. I will go into more detail in the coming weeks but in a nutshell, Hillary Clinton is seen as a safe pair of hands and fairly market neutral, whilst a Trump victory would drive uncertainty whose protectionist policies would send shockwaves across global markets, and markets hate uncertainty.