Market Recap – Department of Justice Demands Deutsche Settles

Market Digest – Week Ending 9/16/16

Markets were choppy after last Friday’s selloff shattered two months of calm. Still, US stocks and bonds finished the week about where they started. International stocks were down as investors re-examined the likely magnitude of stimulus measures by the European Central Bank and Bank of Japan. The Basic Materials sector was full of M&A news. Bayer agreed to acquire Monsanto for $66 billion, although the market is skeptical the deal with be approved. Potash and Agrium agreed to a $36 billion merger, while Praxair and Linde walked away from a potential $60 billion deal.

Weekly Returns:

S&P 500: 2,139 (+0.5%)
FTSE All-World ex-US: (-2.2%)
US 10 Year Treasury Yield: 1.69% (+0.02%)
Gold: $1,310 (-1.3%)
USD/EUR: $1.116 (-0.6%)

Major Events:

• Monday – Industrial gas giants Linde and Praxair called off merger talks over disagreement on management and control direction.
• Monday – Canadian fertilizer giants Agrium and Potash agreed to merge.
• Monday – HP acquired Samsung’s printer business for $1.05 billion.
• Tuesday – Wells Fargo CEO John Stumpf defended the bank and blamed millions of accounts unknowingly opened by employees.
• Wednesday – Bayer agreed to buy Monsanto for $66 billion, setting up a long fight with anti-trust regulators.
• Thursday – The US formally recalled one million Samsung Galaxy Note 7 phones due to potential fire hazard. On the same day, Apple said its iPhone 7 Plus was sold out, giving the US phone maker’s shares a boost.
• Thursday – US authorities requested a $14 billion penalty from Deutsche Bank related to mortgages in the subprime crisis, but the bank said it had no intention of paying such a sum.
• Friday – Unilever was said to be in talks to buy Jessica Alba’s Honest brand for between $1 billion and $1.7 billion.
• Friday – Intel raised its revenue forecast for Q3 on signs of increasing PC demand.

Our take:

The US Department of Justice issued a $14 billion demand from Deutsche Bank to settle claims related to the sale of mortgage backed securities. The sum is far greater than expected, though it will still go through long negotiations. This uncertainty led to 10% drop in the stock on Friday and fueled fears that Deutsche Bank is on the verge of a collapse which will lead to a Lehman Brothers moment and spark another global financial crisis.

We don’t think so.

First, the Lehman failure happened rapidly. With the benefit of hindsight, creditors should have been prepared, but they weren’t. Now there is a plenty of time to check the books for any risk a Deutsche Bank collapse may pose. Second, and more importantly regulators are much more aware of the risks of an unsupervised bankruptcy of a major financial firm. Lehman caused all sorts of problems, but to the government’s credit, it learned quickly (over the weekend) and made bold assurances to creditors of struggling AIG which likely saved the economy from much more serious damage. With that experience, in the unlikely event Deutsche Bank fails, we can count on a much more managed process with all sorts of government guarantees to maintain stability within the financial system.


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