Week of October 3, 2016
Global markets were dominated by continued bad news stemming from Germany's Deutsche Bank. Equities fell as a result with all three of our major domestic indices roughly neutral for the week, up less than 0.26%.
International stocks didn't fare much better. Japan's Nikkei 225 Average and the MSCI Europe posted numbers solidly in the red, closing out last week down 2.11% and 0.43%, respectively. This week's commentary includes a deeper review of Deutsche Bank's situation and the rising Japanese yen and what it means for their economy. We also take a look at OPEC's tentative production agreement before rounding out our commentary with a story on the "Big Five" marathon.
Deutsche Bank's Woes
Deutsche Bank, Germany's largest bank and one of the largest in the Eurozone, appears to be just barely treading water. Aside from the bank's stock being down more than 45% year-to-date and hitting historic lows, news broke that the US Justice Department is seeking a $14 billion settlement as part of mortgage-securities probes. The news reignited fears that the bank, severely under-capitalized, could be put in a position where Berlin would have to bail them out. However, there may be a problem with that approach. Germany's own chancellor, Angela Merkel, along with her finance minister, Wolfgang Schauble, have pushed for new Eurozone rules that require creditors, or bondholders, to share in the loss before government support is provided. This is what's known as a "bail-in" and it prevents the tax payer from ultimately taking a hit. Unfortunately, Merkel and the European Union are between a rock and a hard place. First, Deutsche Bank is a globally connected bank and a crisis at Deutsche could have a domino effect on banks in the region and across the globe, making a failure highly undesirable. Second, should Berlin seek to find a "loophole" in the Eurozone rules and bail out the bank, periphery countries with their own banking stresses and those that are considering a referendum on European Union membership could get the nudge they need to follow Britain's path. The future of the European Union was already in question after the Brexit vote, but just one or two more exits could seal its fate.
Data above as of 9/26/2016
The Rise of the Yen
As of this writing, the Japanese yen is up a staggering 20% relative to the US dollar and it's making the Bank of Japan's job all the more difficult. Indeed, the stronger yen makes Japanese goods more expensive to its international buyers, throwing a wet blanket on the economy. What's more, this is the eleventh straight month that Japanese exports have declined. This also reinforces something we have been commenting on in our past commentaries. Despite actions taken by central banks to ignite inflation and spending, all while devaluing their currencies, the market appears to have different plans. Conventional wisdom states that lower rates should push investors out of bonds, decreasing the demand for yen and driving inflation, but there have been a rash of side effects. The first and most obvious has been the decreased profitability of banks, insurers and pension funds but the stigma attached to ultra-low or negative rates has hit consumer confidence and led to investors fleeing towards the relative safety of the low-yielding bonds. There is yet some hope for the yen. Should the Federal Reserve raise rates by the end of 2016, it could slow the rise of the yen as investors jump into US Treasuries.
Finally a Deal?
Oil prices popped last Wednesday on news that the Organization of Petroleum Exporting Countries, or OPEC, has finally agreed to a production cut after numerous failed discussions. According to sources close to the deal, OPEC had agreed to limit production to 32.5 million barrels per day and, once that target is reached, the cartel will go to non-members to support the cap. We would note that the decision is not yet final as member-states continue discussions at their informal meeting in Algiers and a final agreement is expected to be released closer to the organization's formal meeting in November. While the official agreement would certainly provide some support for oil prices and the informal agreement has already, slowing or stalling global growth could continue to weigh on the commodity.
Fun Story of the Week
Leave it to marathoners to up the ante. Apparently the thought of running the 26.2 miles faster than anyone else just isn't extreme anymore. This is where the Danish company, Albatros Adventure Marathons, comes in with their Big Five Marathon held in a game reserve in South Africa. The "Big Five" stands for the five most difficult African species to hunt: rhinoceros, leopard, buffalo, elephant and lion. Being a game reserve, the area is filled with these animals and runners are instructed to listen the park rangers, especially the ones scanning the savannah with binoculars and a rifle. Chances are there's something lurking in the tall grass. As of this writing, no runner has been hurt by the natural inhabitants but the rangers take all the necessary precautions. Elephants and rhinos have a mischievous habit of pulling off the signs marking the course so the race team and rangers make sure to repost and stay with the runners. Other rangers are tasked with tracking down the local lions, heading out the night before and tracking the big cats until every last runner is picked up or crosses the finish line.
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This newsletter was written and prepared by CWM, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors.
The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index.
S&P 500 INDEX
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
NIKKEI 225 AVERAGE INDEX
The Nikkei 225 Average Index is a Japanese index that tracks the top 225 companies listed on the Tokyo Stock Exchange. It includes the most liquid Japanese stocks listed in the first section of the Tokyo Stock Exchange. It is price-weighted and yen-denominated.
MSCI EUROPE INDEX
The MSCI Europe Index captures large- and mid-cap companies across 15 developed markets countries in Europe.
CNBC, September 2016. http://www.cnbc.com/2016/09/27/oil-prices-climb-after-industry-data-shows-us-stocks-draw.html
CNBC, September 2016. http://www.cnbc.com/2016/09/28/deutsche-bank-crisis-explained.html
Wall Street Journal, September 2016. http://www.wsj.com/articles/yens-rally-makes-bank-of-japans-job-tougher-1474495898
Wall Street Journal, September 2016. http://www.wsj.com/articles/deutsche-bank-shares-see-saw-as-justice-department-fine-looms-1474995525
Wall Street Journal, July 2016. http://www.wsj.com/articles/the-latest-in-marathon-one-upmanship-have-you-ever-run-from-a-rhino-1469991934