Financial Crisis Of 2017 In The Making (Part 2)

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Includes: AAXJ, BAC, BCS, BMDPY, BNPQF, C, CRZBF, CS, DB, DBA, DBP, DIA, EEM, EWG, EWJ, EWQ, EWU, FEZ, GLD, GS, HSBC, JPM, LYG, MCHI, MS, NBGIF, NMR, PPLT, RBS, SCGLF, SLV, SPY, UBS, UCO, UGA, UNCFF, UNG, USO, UUP, XLF, XLU
by: Nikolaos Giannoulis

Summary

Italian referendum has increased volatility but a “no” win could fire it.

Waiting for details of a possible settlement of DB fine from DoJ.

Brexit stance to become clearer within the first months of 2017.

Political landscape change and voters become less predictive.

All last week's economic figures generally in line with estimates. Housing market figures in UK and unemployment rate in US slightly better than expected while initial jobless claims missed estimates.

Next week will be quite interesting starting with the announcement of results of the Italian referendum and the presidential election results in Austria early on Monday. Also expecting PMI figures for US and EU on Monday, Interest rate decision from Australian central Bank on Tuesday and ECB on Thursday (ECB could also announce the QE extension for another 3-6 months beyond April 2017). On Tuesday and Wednesday EE and Australia are announcing the GDP figures and initial jobless claims in US are out on Thursday. The week is ending with German trade balance, UK consumer inflation expectations (broadly affecting the interest rate decisions of BoE) and the Oil rig count in US.

Main world indices

S&P 500 lost 1% last week while DJI was up 0.1%. European stocks were down ahead of the Italian referendum with DAX losing 1.7%, the CAC40 0.5% Athens Composite down 1.5%, IBEX down 0.8% and MIB up 3.5%. In Europe the biggest winners were banks and Oil & Gas companies, while the biggest losers were consumer goods & service, technology and retailers. In Asia Nikkei 225 was up 0.2% while Hang Seng lost 0.7%.

World Indices Return

Name

Return since Brexit

1 Week

1 Month

YTD

S&P 500

3.72%

-0.97%

4.48%

7.24%

Dow Jones Industrial Average

6.44%

0.10%

6.74%

10.02%

FTSE 100

6.19%

-1.61%

-1.68%

7.82%

DAX

2.50%

-1.74%

1.37%

-2.14%

CAC 40

1.41%

-0.47%

2.59%

-2.33%

Athens Composite Index

-0.61%

-1.51%

5.57%

-2.76%

IBEX 35

-3.13%

-0.78%

-3.00%

-9.82%

MIB

-4.89%

3.46%

3.72%

-20.22%

NIKKEI 225

13.47%

0.24%

7.54%

-3.19%

HANG SENG

8.13%

-0.70%

-1.08%

2.97%

Source: Yahoo Finance

Ticker

Name

Return since Brexit

1 Week

1 Month

YTD

DB

Deutsche Bank AG

-21.4%

1.2%

-5.5%

-45.7%

OTCPK:CRZBF

Commerzbank AG

-20.2%

0.0%

-7.3%

-40.6%

RBS

Royal Bank of Scotland Group PLC

-31.0%

-5.0%

-12.5%

-42.8%

LYG

Lloyds Banking Group PLC

-27.3%

-0.1%

-7.7%

-27.7%

BCS

Barclays PLC

-9.0%

-2.0%

-0.1%

-22.3%

CS

Credit Suisse Group AG

-1.4%

-1.3%

-1.8%

-40.9%

UBS

UBS Group AG

-13.3%

-2.5%

-3.8%

-32.0%

OTCQX:BNPQF

BNP Paribas SA

1.0%

-2.3%

4.9%

-7.7%

NMR

Nomura Holdings Inc

7.7%

-1.8%

-2.2%

-32.1%

OTCPK:SCGLF

Societe Generale SA

-9.4%

-0.1%

3.0%

-22.8%

HSBC

HSBC Holdings PLC

36.3%

0.0%

10.4%

15.6%

OTCPK:UNCFF

Unicredit SpA

-22.7%

-0.8%

-1.5%

-59.0%

OTCPK:BMDPY

Banca Monte dei Paschi di Siena SpA

-68.5%

0.7%

-23.6%

-86.1%

OTCPK:NBGIF

National Bank of Greece SA

-26.5%

6.3%

8.6%

-41.1%

JPM

JPMorgan Chase & Co

5.4%

-0.9%

1.7%

2.3%

C

Citigroup Inc

9.3%

-1.4%

4.0%

-6.1%

BAC

Bank of America Corp

14.0%

-0.8%

2.4%

-4.9%

GS

Goldman Sachs Group Inc

11.7%

0.4%

2.6%

-5.4%

MS

Morgan Stanley

17.5%

-0.7%

1.6%

0.8%

Source: Yahoo Finance

Deutsche Bank

The stock price may have recovered (+50% from its lows in September (9.9) but this is only due to the belief that the US Department of Justice will reduce the fine from the $14bn after Trump election win. While the DoJ and the German bank may be able to agree on a lower amount to be paid, we continue to believe that the bank is facing challenges. One challenge is that the bank has set aside 5.9bn euro ($6.2bn) for legal costs last quarter which means that the fine has to be reduced by 50%. German laws limit the amount of new shares it can issue in a year to 50% of the outstanding total. At current levels this means that the company can raise up to 10bn euro ($10.6bn). However the price can change substantially and DB may have to raise new shares at discount of the prevailing market price to make the capital raise attractive. At a price of 9 euro the company will be able to raise only up to $6bn. We consider DB too big to fail due to the interconnections and the government may step in in case of emergency or the company may raise capital through a "special" arrangement with a private investor (see Warren Buffett $5bn investment in GS during the 2008 crisis). But the fine by the US DoJ is not the only issue the bank is facing. Since the DoJ announcement the company has clients pulling money out and the company is losing significant employees.

Ticker

Name

Return since Brexit

1 Week

1 Month

YTD

SPY

SPDR S&P 500 ETF Trust

4.2%

-0.8%

4.7%

7.8%

DIA

SPDR Dow Jones Industrial Average ETF Trust

6.6%

0.2%

6.9%

10.2%

XLF

Financial Select Sector SPDR Fund

19.6%

1.1%

16.0%

17.1%

XLU

Utilities Select Sector SPDR Fund

-7.0%

-0.8%

-2.3%

8.1%

VIX

Volatility Index

-18.1%

14.4%

-26.9%

-22.5%

EURO STOXX 50 VOLATILITY

-27.6%

20.9%

6.4%

18.1%

GLD

SPDR Gold Trust

-6.6%

-0.4%

-9.3%

10.5%

UUP

PowerShares DB US Dollar Index Bullish Fund

7.9%

-0.7%

3.4%

1.6%

FEZ

SPDR EURO STOXX 50 ETF

-7.5%

-0.5%

-2.7%

-9.1%

Source: Yahoo Finance

World ETF Performance

Ticker

Name

Return since Brexit

1 Week

1 Month

YTD

IWRD

iShares Core MSCI World UCITS ETF

2.14%

-0.37%

2.43%

4.61%

SPY

SPDR S&P 500 ETF

4.21%

-0.83%

4.74%

7.75%

DIA

SPDR Dow Jones Industrial Average ETF

6.63%

0.23%

6.91%

10.20%

EWG

iShares MSCI Germany ETF

-4.99%

-0.92%

-3.02%

-5.54%

EWQ

iShares MSCI France ETF

-5.30%

0.09%

-1.68%

-3.39%

EWU

iShares MSCI United Kingdom ETF

-8.31%

0.20%

2.05%

-5.98%

CSX5

iShares Core EURO STOXX 50 UCITS ETF

-0.04%

-0.91%

1.41%

-4.37%

EWJ

iShares MSCI Japan ETF

4.86%

0.26%

-0.76%

2.35%

AAXJ

iShares MSCI All Country Asia ex Japan ETF

2.85%

0.11%

-2.85%

6.01%

EEM

iShares MSCI Emerging Markets ETF

1.04%

-0.37%

-3.52%

9.10%

MCHI

iShares MSCI China ETF

7.70%

-0.74%

-0.89%

2.85%

Source: Yahoo Finance

Italy's referendum is causing headaches.

Another issue for the European Banking system is the Italian referendum which takes place on Dec 4th. If "NO" prevails, the most probable scenario is that Mateo Renzi, the Italian Prime minister, will resign and the country will be led to a government of technocrats and new elections. The referendum though is not directly linked to the country's EU membership but it could have a detrimental effect on the banking system. The last few weeks already found the Italian yields and the stock market volatility higher and the banks' stock price lower.

Many analysts have warned investors that a "NO" win would lead to a high volatility in the euro, Italian Banks, and a raise in the Italian spreads. The probability of a sell-off in case of a failure of Mateo Renzi to convince Italians to vote in favour of the country's constitution is high and even ECB officials have mentioned that the ECB will intervene in any economic shock. It could be the case that a "NO" in the referendum does not cause a great deal of instability in the short term but it could influence the voters in other countries such as Germany and France where elections are to be held next year

FTSE Weekly Winners/Losers

Ticker

Name

Weekly Return

SGE

Sage Group PLC

-7.39 %

MDC

Mediclinic International PLC

-6.48 %

AZN

AstraZeneca PLC

-5.73 %

LSE

London Stock Exchange Group PLC

-5.52 %

CRH

CRH PLC

-5.02 %

CCL

Carnival PLC

-4.99 %

CPI

Capita PLC

-4.91 %

EZJ

easyJet plc

-4.85 %

GSK

GlaxoSmithKline PLC

-4.77 %

ADM

Admiral Group PLC

-4.32 %

DC.

Dixons Carphone PLC

4.31 %

BP

BP PLC

2.57 %

TW.

Taylor Wimpey PLC

2.45 %

EXPN

Experian PLC

2.37 %

AHT

Ashtead Group PLC

2.33 %

CNA

Centrica PLC

2.01 %

RDSB

Royal Dutch Shell PLC

1.94 %

LGEN

Legal & General Group PLC

1.93 %

RDSA

Royal Dutch Shell PLC

1.84 %

RRS

Randgold Resources Ltd

1.84 %

Source: Yahoo Finance

S&P500 Weekly Winners/Losers

Ticker

Name

Weekly Return

VRTX

Vertex Pharmaceuticals Inc

-13.98 %

TRIP

TripAdvisor Inc

-9.20 %

COTY

Coty Inc

-9.00 %

HRB

H & R Block Inc

-8.51 %

QRVO

Qorvo Inc

-7.94 %

MAT

Mattel Inc

-7.53 %

MAS

Masco Corp

-7.31 %

KLAC

KLA-Tencor Corp

-7.31 %

CRM

Salesforce.com Inc

-7.22 %

AVGO

Broadcom Ltd

-7.09 %

RIG

Transocean Ltd

14.49 %

HP

Helmerich and Payne Inc

14.15 %

MRO

Marathon Oil Corp

11.79 %

NFX

Newfield Exploration Co

11.34 %

HES

Hess Corp

9.84 %

CHK

Chesapeake Energy Corp

9.71 %

HAL

Halliburton Co

9.41 %

XEC

Cimarex Energy Co

8.66 %

DVN

Devon Energy Corp

8.18 %

EOG

EOG Resources Inc

8.09 %

Source: Yahoo Finance

Commodities

Mixed picture in metals last week, with silver gaining 1.8% and platinum 2.7% while gold was slightly down (-0.26%) and copper down 1.95%. On the other hand, energy commodities were massively up for the week; crude oil was up 12.2%, Brent crude 15.3% and natural gas 11.4% as a result of the announcement that OPEC countries have reached a deal to cut oil production to support prices.

Ticker

Name

Return since Brexit

1 Week

1 Month

YTD

GLD

SPDR Gold Shares ETF

-6.64%

-0.42%

-9.30%

10.53%

SLV

iShares Silver Trust ETF

-4.00%

1.28%

-9.85%

20.02%

USO

United States Oil Fund

-4.17%

11.13%

11.67%

4.36%

UCO

ULTRA BLOOMBERG CRUDE OIL ETF

-14.36%

21.45%

22.38%

-10.61%

DBA

PowerShares DB Agriculture Fund

-10.95%

-3.05%

-3.81%

-4.51%

UNG

United States Natural Gas Fund

7.54%

7.67%

16.15%

0.35%

PPLT

ETFS Physical Platinum Shares ETF

-3.75%

2.61%

-6.32%

4.04%

DBP

PowerShares DB Precious Metals Fund

-7.26%

-0.11%

-9.62%

11.36%

UGA

United States Gasoline Fund

5.96%

11.87%

6.65%

0.85%

Source: Bloomberg

Commodities Return

Name

Return since Brexit

1 Week

1 Month

YTD

Gold Futures

-6.83%

-0.26%

-10.08%

10.83%

Silver Futures

-3.43%

1.76%

-10.22%

21.62%

NYMEX Light Sweet Crude Oil WTI

3.13%

12.20%

13.98%

39.52%

Brent Crude Futures

6.97%

15.28%

16.22%

46.08%

NYMEX Natural Gas Futures

27.35%

11.38%

23.07%

47.03%

Bloomberg Commodity Index

-1.48%

2.36%

3.76%

10.80%

COMEX High Grade Copper Futures

20.87%

-1.95%

17.48%

23.03%

Platinum Futures

-3.61%

2.67%

-6.73%

4.41%

London Cocoa

-16.84%

-7.00%

-14.60%

-15.96%

Baltic Exchange: Baltic Dry Shipping Index

101.01%

1.44%

43.65%

153.28%

Source: Bloomberg

Our view is that investors look to take any news as a positive but only as cheap financing through lower interest rates is available. Taking as an example the Brexit and the US elections, the markets reacted and experienced high volatility but recovered very soon. On the other hand, central banks' interest rate decisions seem to be more important for equities and more importantly bond investors. This makes sense if one considers the discount rate changes in the models but lower interest rates do not really mean no risk in the markets. The Italian referendum comes just before a few other important events in the EU; Austria's elections today, the Eurogroup on Monday and elections in France and Germany next year.

(>>Part 1)

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

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