Duetsche Bank Continues to Weigh on Riskier Assets

European stock markets are broadly down on the day, which is sending yields lower and dragging on the EUR/USD currency pair. Concerns over Deutsche Bank continue to weigh on lenders and adding to risk aversion in the Eurozone, with peripherals markets under-performing and the Spanish IBEX down -1.70%, against a -1.20% loss in the DAX and a -1.0% decline in the FTSE 100. Reports Thursday that some hedge funds are withdrawing excess cash from Deutsche Bank amid derivatives concerns saw lenders in general coming under pressure and most Asian markets closed with a marked loss, with only mainland China escaping the general sell off after the Caixin/Markit PMI nudged slightly higher.

The decline in Deutsche bank is weighing on financials and the broader stock markets.  The bank has derivatives exposure with hundreds of customers, which could set off a cascade of movement as trading partners attempt to unwind positions they currently have with Deutsche bank.  Although many have debated whether this is a Lehman Brother’s moment, the perception is creating a reality for the German financial institution.

Inflation in Europe is Improving Slightly

In inflation data, the Italian Sep HICP inflation rose to 0.1% year over year from -0.1% year over year, so after two months in negative territory, the annual rate has moved up again, as elsewhere in the Eurozone largely thanks to less negative base effects from energy prices. Transportation costs, which include petrol, were still down -0.2% year over year, but up from -2.2% year over year in the previous month.

French HICP inflation ticked up to 0.5% year over year, from 0.4% year over year in the previous month. The rise was in line with expectations and mirrors the uptick in Spanish and German HICP rates yesterday, with less negative base effects from energy prices a key reason. At the same time, August PPI inflation moved up to -2.0% year over year from -3.0% year over year in the previous month.

Eurozone September HICP inflation rose to 0.4% year over year from 0.2% year over year in the previous month, in line with expectations and indications from national data. The uptick in the annual rate is mainly a reflection of less negative base effects from energy prices and core remained steady at 0.8% year over year. So a confirmation of the ECB’s baseline scenario that inflation is slowly moving higher, but with headline rates still far below 2% the data still back the central bank’s accommodative policy stance.

In other economic data, the UK Q2 current account data showed the deficit widening to GBP 28.7 billion, up from a revised GBP 27 billion in Q1. The median forecast had been for a GBP 30.6 billion deficit, while the Q1 figure was revised down from GBP 32.6 billion. A GBP 2.7 billion widening in the trade gap over the quarter, coupled with a GBP 5.5 billion widening in the deficit of investment income, accounted for the overall rise in the deficit.