27 Mar

The fall of Deutsche Bank has renewed tensions in the banking sector. Oil prices are under pressure

March 27, 2023

By JustMarkets

At the close of the stock market on Friday, the Dow Jones Index (US30) increased by 0.40% (+1.15% for the week), and the S&P 500 (US500) added 0.41% (+1.37% for the week). The NASDAQ Technology Index (US100) gained 0.31% on Friday (+1.80% for the week).

The Federal Reserve raised interest rates by 25 basis points last week, in line with expectations, but signaled that the hike cycle might be coming to an end in response to nervousness about US banks after the unexpected collapse of two medium-term regional small banks. According to analysts, the turmoil in the banking sector, which caused turmoil on Wall Street earlier this month, is likely to lead to a credit crunch for households and businesses in the coming months, creating a meaningful process of disinflation. This will ease the pressure on the central bank, limiting the need for overly restrictive policies. The economy does not yet reflect the real problems that will result from a significant tightening of lending standards, but the negative effects will soon become visible.

While Fed officials still view the possibility of additional rate hikes as a high probability, financial markets are now leaning toward a probability (85%) that there will be no rate hike at all at the Central Bank’s next policy meeting in May.

Equity markets in Europe were mostly down on Friday. German DAX (DE30) decreased by 1.66% (+1.64% for the week), French CAC 40 (FR40) fell by 1.74% (+1.65% for the week), Spanish IBEX 35 (ES35) lost 2.10% (+1.26% for the week), British FTSE 100 (UK100) was down by 1.26% (+0.95% for the week).

On Friday, bank stocks in Europe fell sharply, with Deutsche Bank and UBS Group suffering the most due to fears that problems in the banking sector may persist. Investor attention has recently focused on the German giant Deutsche Bank. Its shares have lost more than a quarter of their value this month, including an 8.5% drop on Friday, and the cost of default protection on its bonds has risen sharply. German Chancellor Olaf Scholz said Friday at a news conference in Brussels that Deutsche Bank “has carefully reorganized and modernized its business model and is a very profitable bank,” adding that there was no reason to speculate about its future. But that hasn’t reassured investors. Kristalina Georgieva, head of the International Monetary Fund, said Sunday that risks to financial stability had risen and urged continued vigilance.

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The shadow banking sector is a “weak point in the financial system” and could trigger the next financial crisis, European Central Bank (ECB) vice president Luis de Guindos has warned. In his opinion, the European banking sector is “reliable and stable,” but the non-banking sector “could become a source of problems for the entire financial sector.

Ukraine demands an extraordinary meeting of the UN Security Council over Putin’s intentions to deploy tactical nuclear weapons on the territory of Belarus. NATO criticizes Putin for his “dangerous and irresponsible” nuclear rhetoric. While the US downplayed concerns about Putin’s statement, NATO said the Russian president’s pledge of nuclear non-proliferation was far from the truth.

The consequences of banks weakening their role in commodities could be far-reaching and negative. How are banks related to oil? No barrel of crude oil can move without financing or liquidity provided by banks. Banks are market makers for all commodities, not just oil, because they bring buyers and sellers together. Therefore, independent oil and gas producers may have limited ability to hedge price risks associated with investments and inventories. A possible recession in the United States, sanctions against Russia over the invasion of Ukraine, the release of strategic reserves, and strikes at refineries in France are all shaking up oil markets. For the growth of oil prices now, it is necessary for the situation in the banking sector to calm down, and demand in China began to recover on the threshold of summer.

Asian markets traded flat last week. Japan’s Nikkei 225 (JP225) gained 0.56% for the week, China’s FTSE China A50 (CHA50) jumped by 2.18% for the week, Hong Kong’s Hang Seng (HK50) ended the week up by 2.91%, India’s NIFTY 50 (IND50) decreased by 0.07%, and Australia’s S&P/ASX 200 (AU200) ended the week down by 0.56%. Most Asian stocks fell Monday amid renewed fears of new bank defaults in the US and Europe, with Chinese markets falling the most as weak results drove oil and gas stocks lower.

In the commodities market, futures on cocoa (+5.19%), orange juice (+4.7%), copper (+4.64%), silver (+4.02%), WTI oil (+3.39%), gasoline (+3.17%) and Brent (+2.78%) showed the biggest gains last week. Futures on lumber (-8.46%), natural gas (-6.72%), soybeans (-3.18%), and wheat (-2.89%) showed the biggest drop.

S&P 500 (F) (US500) 3,970.99 +22.27 (+0.56%)

Dow Jones (US30)32,237.53 +132.28 (+0.41%)

DAX (DE40) 14,957.23 −253.16 (−1.66%)

FTSE 100 (UK100) 7,405.45 −94.15 (−1.26%)

USD Index 103.12 +0.58 (+0.57%)

Important events for today:
  • – German Ifo Business Climate (m/m) at 11:00 (GMT+2);
  • – UK BoE Gov Bailey’s Speech at 20:00 (GMT+2).

By JustMarkets

 

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.


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