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The Overnight Report: Deutsche Uber Alles

Daily Market Reports | Sep 27 2016

This story features WOOLWORTHS GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: WOW

By Greg Peel

The Dow closed down 166 points or 0.9% while the S&P lost 0.9% to 2146 and the Nasdaq fell 0.9%.

Fresh Fear People

It seems the Germans have been front and centre of corporate news these past twenty four hours.

While Woolworths ((WOW)) has suffered through its Masters failure, with problems still ongoing, the biggest negative influence on Australia’s established supermarkets recently has been the incursion of Aldi. Now the news is another German chain, Lidl, is eyeing off prospects downunder.

This news sent Woolworths shares down 2% yesterday, dragging the consumer staples sector to a market-leading 1% loss. On the flipside, the potential of a new player in the game meant a good day for the retail REITs, with Scentre Group ((SCG)), Vicinity Centres ((VCX)) and Westfield ((WFD)) all enjoying gains.

It was also a good day for serial laggard SAI Global ((SAI)) following a takeover bid from private equity.

Otherwise the focus was on the energy sector, with the oil price having fallen 3% on Friday night. Energy stocks duly opened weaker and dragged down the ASX200, but oil prices began to recover over the Asian session and in the end, the local energy sector closed flat.

In the ongoing soap opera that is OPEC, On Friday night we saw oil futures sell off heavily following comments from the Saudis that this week’s meeting is merely a consultation and no agreement on a production freeze is expected to be reached. But since then the Saudis have flipped the game around once more, suggesting they are prepared to actually cut production rather than offer what is really a meaningless freeze at record levels.

Could there be any skerrick of truth in this suggestion? History would suggest no, but risk would suggest it’s best to play it safe. So this morning the WTI price has recovered 2%.

The wash-up in Australia yesterday was a pretty flat close across most sectors, including the banks. That could change this morning.

Don’t Mention Lehman

Unlike US and Australian banks, European banks have not spent the period since the GFC rebuilding and then reinforcing their balance sheets, whether willingly or under regulatory pressure. Instead they have been forced to deal with ongoing trading losses as the European economy has shifted from crisis to crisis, from Grexit to Brexit, without ever gaining meaningful traction.

Earlier this year, as one by one the big names in European banking reported significant losses, share prices began to sink like stones. Leading charge was Deutsche Bank. But Deutsche was able to right the ship, and the sector, by exploiting a zero interest rate environment to instigate a significant share buyback. This has nevertheless only proven to be a temporary reprieve.

The US Department of Justice has spent the last year handing out massive fines to all banks operating in the US which relate to mortgage sales dating back to pre-GFC. Recently, Deutsche copped a US$14bn fine. Once upon a time this was a lunch bill for Germany’s leading bank. But now Deutsche is wondering just where it might find the money. Angela Merkel has ruled out a government bail-out. The fear is Deutsche may need to raise capital.

Deutsche shares fell 7% last night and took the global banking sector down with them. The recovery in the oil price provided some balance but not enough to prevent 0.9% falls in the major indices. It is also assumed some nervous investors were moving to the sidelines ahead of the circus that is the first US presidential debate, due to kick off later this morning Sydney time.


West Texas crude is up US94c or 2.1% at US$45.63/bbl.

Clearly base metals traders are not currently focused on any macro themes. Last night saw aluminium up 1.5% and lead, which had fallen on Friday night, up 1.5%, nickel down 1%, copper down 0.5% and zinc flat.

Iron ore fell US10c to US$56.40/t.

The US dollar index is down 0.2% at 95.30 and the Aussie is up 0.2% at US$0.7636 but gold is rock steady at US$1337.90/oz.


The SPI Overnight closed down 44 points or 0.8%. Yesterday it was oil, today it is the banks expected to lead the market lower.

While presidential debates normally having little impact on financial markets, this time it’s potentially different. Asian-zone markets will be first responders if there is any major stumble, and the assumption is any apparent ascension by The Donald would evoke a disquieting feeling of dread.

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