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Stocks slide as bank stress levels rise

London - Deutsche Bank’s financial woes are spreading deeper into global financial markets.

Banking shares led losses in global stocks as Germany’s largest lender tumbled to a record low, its bonds slid and its credit risk climbed to a record. The dollar strengthened with government bonds while gold rose for the first time in four days as investors poured into haven assets.

What’s set to be the best quarter of the year for global stocks is ending on a sour note as concern mounts over Deutsche Bank’s ability to withstand pending legal penalties and hedge funds reduce their financial exposure.

While its shares have more than halved in value this year and cross-currency swaps show the biggest weekly increase in two years, systemic concerns have a way to go to reach levels sparked by the collapse of Lehman Brothers Holdings in 2008 after regulators and central banks took steps to shore up the financial system.

"Markets are spooked by the stories about clients cutting exposure to the troubled German lender," said Valentin Marinov, the head of Group-of-10 currency strategy at Credit Agricole’s corporate and investment-banking unit in London.

"The risk is that, with the European Central Bank running out of options to ease, they may struggle to contain market turmoil."

Deutsche Bank shares tumbled as much as 9% and its additional Tier 1 notes, the riskiest form of bank debt, fell to record lows. Its €1.75bn of 6% bonds dropped five cents on the euro to 70 cents, according to data compiled by Bloomberg.

The cost of insuring the bank’s subordinated bonds against default rose to an all-time high on a closing basis, according to CMA data. Senior credit-default swaps reached the highest since February, the data show.

Stocks

The MSCI All-Country World Index slid 0.6% as of 6 in New York, paring this quarter’s advance to 4%. The Stoxx Europe 600 Index slid 0.9%.

Commerzbank lost 5.4%, as HSBC Holdings downgraded the lender to hold, saying its new strategy announced Thursday isn’t convincing. ING Groep dropped 2.5% after a report that the largest Dutch lender will announce thousands of job cuts next week.

Telefonica SA lost 4.6% after cancelling an initial public offering of its infrastructure unit Telxius Telecom, amid weak investor demand.

S&P 500 Index futures were little changed. Investors will look on Friday to data on consumer spending, sentiment and Chicago-area manufacturing for indications of the health of the world’s biggest economy.

Hong Kong shares led losses in Asia with the city’s stock-exchange link to Shanghai having already closed before a week-long holiday in China. Inflows via the channel helped drive a 12% gain in the Hang Seng Index this quarter, the region’s best performance.

Currencies

The Bloomberg Dollar Spot Index rose 0.2%. The pound advanced against most of its major peers and was on course for its first weekly gain versus the euro since September 2.

The yen appreciated 0.3% to 113.03 to the euro extending a three-week advance of 2.3% since September 2.

India’s rupee was the best-performing emerging-market currency as the nation and Pakistan moved to contain military tensions after Prime Minister Narendra Modi’s administration announced it killed terrorists just across the border.

The cost for European banks to fund in dollars, a gauge of risk in the region’s financial system, rose to the most expensive level in more than four years amid Deutsche Bank’s woes.

The three-month cross-currency basis swap, the rate for banks to convert euro payments into dollars, fell to 57 basis points, or 0.57 percentage point, below the euro interbank-offered rate, according to data from ICAP.

That’s the most negative reading on a closing basis since July 2012. The measure reached as much as 154.5 basis points below Euribor in November 2011.

While so-called FRA/OIS spreads, a measure of bank risk, were set for their biggest weekly jump since June, the front contract was at a record low as recently as two weeks ago.

Quarterly scorecard

Stoxx 600 is on course for a 2.9% jump in the three months through September, its first quarter of gains this year. Pound is set for its fifth quarterly decline against the dollar, its longest such run since 1984.

Against the euro, sterling was set to weaken for a third quarter. Portugal is being left out of the rally in European sovereigns, with its 10-year bonds set for their fourth quarterly decline. That’s the longest losing streak since 2011.

MSCI Emerging Markets Index is up 8.2%, headed for its best quarter since 2012, on accommodative US monetary policy. South Africa’s rand, South Korea’s won led developing-nation currencies to a third consecutive quarterly advance. Tin climbed 17% since the end of June, poised for its best quarter in three years.
 
Nickel soared more than 11% for the second quarter in a row, the first time this has happened in two years. Palladium jumped 20%, the biggest quarterly gain since 2010. Oil’s 2.5% decline is the first quarterly drop this year.

Bonds

Europe’s highest rated bonds advanced as investors opted for their relative safety. German bunds were set for their third week of gains. The yield on the 10-year bund fell three basis points, or 0.03 percentage points, to minus 0.15%, having earlier reached minus 0.16% which matched the lowest since July. The yield has dropped 15 basis since the week ended September 9.

Higher-yielding bonds such as those from Portugal declined. The yield spread between Portugal’s 10-year bonds and similar-maturity bunds widened to 3.53 percentage points, approaching its highest close since February.

Gains in euro-area bonds have driven the total number of securities in the region yielding less than the European Central Bank’s deposit rate of minus 0.4% to more than $2trn, which is more than a third of the total number of bonds comprising the Bloomberg Eurozone Sovereign Bond Index.

The US 10-year Treasury yield declined two basis points to 1.54%.

Commodities

Gold rose 0.4% to $1 326.30 an ounce. Following the best first half in 40 years, interest in the metal has waned as prices barely budged in the second quarter. The 60-day volatility is near the lowest in more than a year and the amount of metal added to exchange-traded funds has slowed.

Holdings backed by gold have climbed 4% this quarter after jumping 21% in the first three months of the year and 11% in the second quarter.

Crude oil fell 1.3% to $47.22 a barrel in New York, after gaining more than 7% over the last two days. While Wednesday’s agreement among Organisation of Petroleum Exporting Countries imposed an overall production cap on the group of 14 oil producers, it didn’t assign individual limits - that was left to a committee that will report back at OPEC’s next meeting in November.

"It’s good that OPEC is going to limit production but sticking to the deal is the big headwind facing the organization," said David Lennox, a resources analyst at Fat Prophets in Sydney.

"We’re yet to get the exact details on which countries will contribute the cut, but the Saudis could handle that on their own without too much hassle."

Most industrial metals retreated, with copper, aluminium and nickel falling by at least 0.2% in London. The declines come after the LMEX Metals Index ended on Thursday at a one-year high.

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