Stocks Fall as Deutsche Bank Woes Roil Lenders; Treasuries Climb

  • U.S. oil tops $47 as gains extended after OPEC freeze deal
  • Most Asian index futures retreat amid banking stock selloff

OPEC Production Cut: Saudi Arabia's Big Gamble

Stocks fell, while Treasuries climbed as mounting concern over Deutsche Bank AG’s finances roiled global lenders. Oil extended its surge.

Equities erased gains after Bloomberg News reported about 10 hedge funds that do business with the German lender have moved to reduce their financial exposure. Deutsche Bank’s shares traded in the U.S. tumbled to a record low, spurring a slump in American banking equities. Treasuries reversed losses as traders sought out haven assets, while the dollar rose against most of its major counterparts. U.S. crude climbed above $47 a barrel.

Traders pushed down the value of equities after the report on Deutsche Bank rekindled concern over the health of the financial industry. Chief Executive Officer John Cryan has been struggling to convince investors that the lender has the funds to deal with legal bills tied to past misconduct, including a request for $14 billion from the U.S. Department of Justice. Its shares have lost more than half of their value this year, while the cost to protect against a default has soared. The International Monetary Fund said in June that the bank may be the biggest contributor to systemic risk among the largest financial companies.

“The Deutsche Bank situation is major,” said Timothy Ghriskey, who helps manage $1.5 billion as chief investment officer at Solaris Asset Management LLC in New York. “I’m not saying this is the beginning of a global financial crisis, aka 2008, but it’s certainly a cause for some concern.”

The funds, which use Deutsche Bank’s prime brokerage service, have moved part of their listed derivatives holdings to other firms this week, according to an internal bank document seen by Bloomberg News. While the vast majority of Deutsche Bank’s more than 200 derivatives-clearing clients have made no changes, the hedge funds’ move highlights concern among some counterparties about doing business with Europe’s largest investment bank.

Deutsche Bank has struggled to adapt to an era of tougher capital requirements and negative interest rates, stirring up speculation that the government might be forced to offer support. Another giant of the industry -- Commerzbank AG -- is planning to reduce about one in five jobs, suspend dividends and shrink securities trading in the biggest overhaul since the its bailout. In the U.S., Wells Fargo & Co.’s Chief Executive Officer John Stumpf endured a second day of withering assaults from lawmakers over the bank’s fake-account scandal.

Stocks

The S&P 500 Index fell 0.9 percent to 2,151.13 as of 4 p.m. in New York, after trading little changed for most of the session. Wells Fargo and JPMorgan Chase & Co. dropped more than 1.5 percent, while U.S.-traded shares of Deutsche Bank slumped 6.7 percent to the lowest level since they were listed.

The Stoxx Europe 600 Index almost completely erased its advance in the last hour of trading as oil’s gains weighed on airlines. Credit Suisse Group AG rose after people familiar with the matter said the bank could settle a U.S. investigation into its mortgage-bond dealings within weeks. Bankia SA gained with the Spanish government considering merging the lender with Banco Mare Nostrum SA. Deutsche Bank rose 1 percent as Commerzbank fell 3.1 percent.

An MSCI gauge of global shares dropped 0.3 percent, remaining on track for its longest run of monthly gains since June 2014.

In Asia, most index futures signaled losses amid the bank-stock declines in Europe and the U.S. Contracts on Japan’s Nikkei 225 Stock Average fell with those in Australia, South Korea and China, while futures on Hong Kong’s Hang Seng China Enterprises Index edged up 0.1 percent. Markets in mainland China are closed next week for holidays.

Bonds

Ten-year Treasury yields fell one basis point, or 0.01 percentage point, to 1.56 percent, according to Bloomberg Bond Trader data, while rates on two-year notes slipped two basis points to 0.74 percent.

Traders gravitated toward quality assets amid concern Frankfurt-based Deutsche Bank’s woes could spread to counterparties, damping Europe’s fragile economic recovery.

“If you take a step back, Deutsche Bank’s solvency doesn’t seem to be a critical risk yet,” said Ed Al-Hussainy, senior global interest-rate analyst at Columbia Threadneedle Investments in Minneapolis. But “if it does start to happen, it happens pretty quickly, and I’m cognizant of that.”

Currencies

The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 major peers, rose 0.2 percent, after declining 0.4 percent over the previous three days.

The greenback pared its retreat this year to 4 percent after Fed Chair Janet Yellen said Wednesday that the majority of the central bank’s policy-setting group sees an interest-rate increase as likely needed this year. Fed Bank of Atlanta President Dennis Lockhart said Thursday that the central bank is nearing its goals for maximum employment and inflation near 2 percent, leaving the economy primed for a rate hike. His Philadelphia counterpart, Patrick Harker, said policy makers should begin raising borrowing costs.

“The Fed speakers continue to try their absolute best to guide the market to increase pricing for December,” said Sam Lynton-Brown, a foreign-exchange strategist at BNP Paribas SA in London.

The yen, a classic haven play, weakened for a third day against the dollar amid optimism higher oil prices would help Bank of Japan Governor Haruhiko Kuroda achieve his inflation goals. Meanwhile, Colombia’s peso jumped on speculation the country will see higher revenue from crude exports after the OPEC deal to reduce output.

South Africa’s rand led losses on speculation inflows arising from Anheuser-Busch InBev SA’s purchase of SABMiller Plc may have run their course.

Commodities

Oil rose to a one-month high after the Organization of Petroleum Exporting Countries agreed to reduce production for the first time in eight years, surprising traders who had expected members to maintain output.

West Texas Intermediate oil futures climbed 1.7 percent in New York after surging 5.3 percent on Wednesday. The group agreed to cut production to a range of 32.5 million to 33 million barrels a day, Iran’s Oil Minister Bijan Namdar Zanganeh said after talks in Algiers. The decision marks the end of the two-year pump-at-will policy that was advocated by Saudi Arabia.

“They showed that they will act before prices drop below $40,” said Ed Morse, head of commodities research at Citigroup Inc. in New York. “The Saudis have tweaked their earlier position to let markets decide the price of oil. Now they will make seasonal adjustments to maximize revenue.”

The Bloomberg Commodity Index rose 0.1 percent amid oil’s rally, with lead, zinc, hogs and soybeans all up at least 0.5 percent.

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