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Deutsche Bank bleeds as contagion spreads

The banking crisis is not over, judging by today's price action in large EU banks. Should the investors in EU be worried?

Deutsche Banks shares, which have lost more than a fifth of their value so far this month, dropped as high as 14% on Friday, falling to fresh six-month lows.

The bearish pressure follows yesterday’s losses at US banks, which continued despite Treasury Secretary Janet Yellen’s assurances to Congress that authorities would be prepared to take more steps to protect depositors if necessary.

Deutsche Bank is getting risky

According to data from S&P Market Intelligence, Deutsche Bank’s credit default swaps (CDS), a kind of protection for bondholders, soared beyond 200 basis points (bps) – the highest level since early 2019 – from 142 bps just two days before.

According to Refinitiv statistics, Deutsche CDS experienced its greatest one-day increase on Thursday.

“Deutsche Bank has been in the spotlight for a while now, in a similar way to how Credit Suisse had been,” Stuart Cole, a head macroeconomist at Equity Capital, said.

In the meanwhile, some of Deutsche Bank’s bonds were also sold. As a result, the yield on its 7.5% Additional Tier-1 dollar notes rose to 24%, with the price falling almost 3 cents to 72.868 cents per dollar. According to Tradeweb statistics, this yield is more than twice what it was two weeks ago.

CS “merger” was not an excellent example for investors

AT1s issued by banks have come under pressure after Credit Suisse was forced to write down $17 billion of its AT1s as part of a forced takeover by UBS over the weekend.

“The aftermath from the loss of AT1 bonds in the CS rescue has created worries about a vital source of bank funding, making it more difficult for DB to resolve its challenges,” Cole added.

Since authorities and business executives have attempted to reassure investors about the industry’s stability, pressure is mounting on European banks. Yesterday, Deutsche Bank management board member Fabrizio Campelli stated at a conference that UBS’s government-brokered acquisition of Credit Suisse is “not indicative” of the health of European banks.

You may also read: Wall Street turns into a sea of red after Fed

The overall bearish pressure in the financial sector strengthened after Bloomberg News stated that Credit Suisse Group AG and UBS Group AG are among the institutions under investigation by the US Justice Department in an investigation into whether financial professionals assisted Russian billionaires in evading sanctions.

Banks are using Fed’s facilities

According to Fed data, banks borrowed $110.2 billion from the Fed’s primary discount window during the week ending on Wednesday, a decrease of $42.7 billion from the record amount borrowed during the previous week.

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To the tune of $53.7 billion, borrowing through the Federal Reserve’s new Bank Term Financing Program, which allows banks to exchange high-quality assets for one-year loans, nearly quadrupled.

The significant long-term support for Deutsche Bank shares will be at 7.50 EUR, and if not held, we might see further selling pressure toward the Covid crash lows in the 4.50 – 5.00 EUR zone. On the other hand, the price must climb above the 200-week moving average (the green line) to cancel the immediate selling pressure.

Deutsche Bank daily chart

Deutsche Bank daily chart, source: author´s analysis,


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