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Market Distrust

30 September 2016 by lberuti

“Extraordinarily volatile” would be a politically correct way to describe the financial sector today. A more prosaic way would be to compare it to a headless duck. The day started with mounting concerns about DB’s ( Deutsche Bank AG ) ability to withstand pending legal penalties, as a group of hedge funds that do business with the German bank were rumoured to have moved some of their derivatives portfolios to reduce their financial exposure to DB and avoid another Lehman moment. DB’s risk premium soared as soon as the market opened. When it surfaced in the press that the US Department of Justice would prefer to combine the settlements of DB, CS (Credit Suisse Group AG) and BACR (Barclays Plc) into a single announcement, it served to highlight that the DoJ’s focus is not only on DB and that there is a risk of the DoJ’s opening number for other being just as extreme. The spill over was instantaneous, and every single bank CDS gapped wider. More headlines eventually saved the day and prevented the market to go under: DB would be on its way to settle with the DoJ for $5.4Bln. A couple of weeks ago, it is not obvious such a headline would have triggered a 70bps tightening of DB’s subordinated debt’s risk premium… Meanwhile, the broader credit market could not help reacting to what happened in the financial space. iTraxx Main (ITXEB) and iTraxx Crossover (ITXEX) joined iTraxx Financials and reached new wides for the current series early on. Once ITXEB and ITXEX hit 76bps and 345bps respectively though, profit takers emerged and eventually brought all indices to unchanged levels, with the extra help of the late rumours regarding DB’s settlement.