After struggling all week to gain positive momentum, the U.S. equities market got a reality check heading into the weekend. This time around, the falling price of Deutsche Bank (NYSE:DB) stock sparked fears of a broader contagion. Adding to these anxieties, global central banks continue to raise interest rates in order to contain high inflation.
Major domestic indices had a mixed performance in the late afternoon hours today. After spending much of the day in the red, the S&P 500 poked its head barely above water. Meanwhile, the tech-centric Nasdaq Composite also just barely climbed into the green against the prior session.
For the most part, all eyes shifted toward Deutsche Bank today, with its U.S.-listed shares falling more than 8% earlier this morning before paring back losses. Shares closed about 3% down. However, in Frankfurt trading, DB stock cratered much further. Per a Reuters report, this decline was in response to a sharp rise in the price of the bank’s credit default swaps to a four-year high on Thursday. As Barron’s explains:
“A credit default swap, or CDS, is a financial product that acts like insurance for corporate bonds. A buyer of a CDS pays a fee to hold it, and the seller of the swap makes a payout if the company can’t repay its bonds. Unlike typical insurance products, a CDS buyer doesn’t have to own the corporate bond it corresponds to in order to purchase the CDS or get paid out in a credit event.”
Essentially, with the cost of insuring Deutsche Bank’s debt against the risk of default shooting up, stability concerns only grew.
Why Are Stocks Down Today?
DB stock now finds itself down more than 20% year-to-date (YTD). Of course, most of that damage stems from the events of the past few weeks. In the trailing month, for instance, DB stock has declined about 22%, reinforcing fears around the stability of the financial system. Adding to the worries, global central banks have also continued with their hawkish monetary policy approach.
Despite concerns about regional resilience — especially in light of Credit Suisse (NYSE:CS) and its financial troubles — the European Central Bank recently raised the benchmark interest rate. Earlier this week, the Federal Reserve also pushed up rates by a quarter percentage point. Yesterday, the Bank of England got in on the action as well with its own 25 basis point rate hike.
In fairness, several analysts expressed confusion regarding the decline of DB stock. Thus, retail investors weren’t the only ones asking “Why are stocks down?” today. While Deutsche Bank has its challenges, it still boasts strong capital and solvency positions.
In particular, Citigroup analysts attempted to assuage brewing anxieties:
“We view this as an irrational market […] The risk is if there is a knock on impact from various media headlines on depositors psychologically, regardless of whether the initial reasoning behind this was correct or not.”
German Chancellor Olaf Scholz also backed the embattled bank. “Deutsche Bank has fundamentally modernized and reorganized its business model and is a very profitable bank,” Scholz said at a news conference, “There is no need to worry about anything.”
Why It Matters
Nevertheless, with the failure of some U.S. banks justifying concerns about broader financial strength, investors clearly remain jittery. Notably, European banks provide deposit insurance up to 100,000 euros. However, if rising rates force bond portfolios to lose value, this dynamic may trigger further, panicked selling.
All told, emotions around what-if scenarios are playing a part in why stocks are down today.
On the date of publication, Josh Enomoto did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.