U.S. equities rebounded on Friday thanks to a relief rally in Deutsche Bank AG (USA) (NYSE:DB) shares driven by rumors — unsubstantiated, at this point — that the U.S. government would lower its settlement related to bad mortgage backed securities with the bank to $5.4 billion from the $14 billion initially floated. DB gained 14%.
In the end, the Dow Jones Industrial Average gained 0.9%, the S&P 500 Index gained 0.8%, the Nasdaq Composite gained 0.8% and the Russell 2000 ended the day 1.1% higher. Treasury bonds weakened, the dollar was mixed, gold lost 0.7% and crude oil extended its recent strength adding another 0.9%.
No surprise financial stocks led the way higher, up 1.4%. Defensive utility stocks were the laggards, down 0.7%. Costco Wholesale Corporation (NASDAQ:COST) gained 3.4% on a top- and bottom-line quarterly beat driven by better margins.
Tech stocks took a backseat, a change from their recent pace of relative strength, although HP Inc (NYSE:HPQ) gained 0.9% to push the Oct. $15 calls recommended to Edge Pro subscribers to a gain of 98%.
On the economic front, August personal spending was flat, below the 0.2% gain expected. The savings rate rose for the second straight month to 5.7%. And core PCE spending increased at a 1.7% annual rate, the first acceleration since February.
Back to DB.
After Thursday’s report hedge funds were pulling collateral from the bank on liquidity concerns and indications that the bank’s balance sheet was vulnerable, this was exactly what bank bulls wanted to hear. The trouble is, the rumor remains unconfirmed and structural issues remain including a weak Euro zone economy, risks from Brexit and lingering bad debts.
With confidence fragile, withdrawals of deposits and trade collateral could quickly worsen DB’s liquidity position — as it did earlier in the year before a surge of fresh stimulus from the European Central Bank (including cutting interest rates into negative territory).
Moreover, while DB shares recovered other markets weren’t as impressed. Credit default swaps against the bank, which pay out in the case of default and rallied hard on Thursday, didn’t really suffer much of a decline as shown above. German government bonds remain well bid as well, a sign of ongoing demand for safe havens.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. A two-week and four-week free trial offer has been extended to Fiscal Times readers.
