Article / 30 September 2016 at 8:02 GMT

From the Floor: Bonds riding out Deutsche Bank waves

Your Next Trade
  • Deutsche Bank shares take another dive after some hedge funds exit
  • Deutsche's credit default swap opens at highest of the year — Boye 
  • iTraxx sub-financial showing stress but not at 'Brexit or oil selloff levels' — Boye
  • AUDUSD could be signalling a clear downside move — Hardy
  • USDJPY no closer to resolution as we look to ISMs and Sept. NFP — Hardy
  • Teva Pharmaceuticals, Net and Ralph Lauren all good long candidates — Garnry

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By Martin O'Rourke

Spillover muted

Deutsche Bank is set for another rocky day after yet more negative news for its stock Thursday when a 7% plunge in the share price inevitably cast a shadow on markets overnight and returned risk-off to the fore.

Financial shares took the brunt after Deutsche shares hit a record low and wiped out the gains from the midweek oil rally on the back of that hastily-agreed oil-production deal at Algiers. Despite the sour end to the third quarter, however, it is still the best quarter in Asia since 2012 with the Hang Seng Index leading the way for an approximate 12% quarter-on-quarter rise.

The bonds markets are also feeling the stress as the iTraxx sub-financial widened some 50 basis points, reports Michael Boye from the fixed income desk in Copenhagen on today's morning call.

"If we look at subordinated financials, then we've moved to the 250 level but if you compare that to the 300-plus level during the Brexit vote process and the even more elevated levels at 330 at the time of the oil selloff in January, then we are not yet near to panic levels," says Boye. "Credit markets have not frozen yet."

iTraxx sub financial shoots to 250:

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Source: Bloomberg

It's a similar picture in the iTraxx Crossover, says Boye, which has shot to around the 330 mark but which is still shy of the 350 levels seen during Brexit. Bunds are also struggling to break through the 166 mark and yields remain just five basis points away from an all-time low.

Where does Deutsche Bank go from here? The German government is caught in a quandary given its clear position on rescues and bailouts and its stance towards Greece and the periphery in recent years but any demise of the bank is simply unthinkable.

As for Deutsche itself, there was some relief after the credit default swap opened at near 500 for a year high before heading back towards the 450 area.

Deutsche Bank's CDS jumped to nearly 500 before settling closer to 450 after the open:
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Source: Bloomberg

Long candidates

Putting out a few long candidates in this seesawing market might look contrarian in the circumstances, but Saxo Bank's head of equities strategy Peter Garnry lists three stocks that could be set for a turn.

"Teva Pharmaceuticals is very close to long-term support and while pharmaceuticals took a bit of a hit yesterday, there is a massive gap developing between the current share price and the consensus target price," he says.

Nets, meanwhile, looks like an acquisition target, the equities chief says, labelling the business as very stable with 7% growth rates and a 35% EBITDA margin. "It's a potential acquisition target going forward and looks good on the buy side."

Finally Ralph Lauren is on track with its various turnaround plans and Garnry anticipates a possible earnings surprise on November 3 for the clothes designer.

Nets share price since its IPO and it is one of the companies going under the radar

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Source: SaxoTraderGO

Mixed-bag aussie

The Australian dollar could be set for a sharp push against New-Zealand counterpart, says John J Hardy, Saxo Bank's head of forex strategy, who likes AUDNZD for a push at around the 1.3015 area and "then significantly higher."

Hardy points towards the Reserve Bank of Australia meeting next Tuesday as pivotal for the pair but it is a different story for AUDUSD which the forex head expects could be in for some downside in the near  future.

"The trendline has not been broken but it would signal a selloff," says Hardy. "I would suggest looking to 0.7400 as a technical signal that there is a bear market coming."

Where is AUDUSD heading?
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Source: SaxoTraderGO

As far as USDJPY is concerned, Hardy's hope that there would be a resolution this week now looks almost certain not to happen given that we are at month- and quarter end.

"There is still no resolution to USDJPY and we now look towards next week and the spate of ISMs and the September nonfarm payrolls for some direction but with the US-presidential race in the background, that's occupying people's minds."

And finally...

It is perhaps golf's premier event and the bi-year Ryder Cup that pitches the US and Europe against one another gets underway today. We've debated the role of the Mexican peso as a proxy for the fortunes of republican nominee Donald Trump but could a golf match become a barometer for EURUSD?

Most unlikely, but it will perhaps be more interesting to see if UK-passport holding giants of the game like Justin Rose will still be eligible when the next tournament comes round in 2018 assuming Brexit is in full swing by then. The mind boggles!
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A day to be very watchful on markets as Deutsche Bank's woes continue. Photo: iStock


Martin O'Rourke is managing editor at Saxo Bank

Editor’s note:
From the Floor takes advantage of TradingFloor.com's unique real-time access to Saxo Bank’s various trading desks around the globe to put our community in touch with the developments that matter to their portfolios.

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