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Fears for the health of the banking sector battered European stocks again on Friday, with a spike in Deutsche Bank’s credit default swaps the catalyst for another chaotic session for equity markets.
The lender ended sharply lower and dragged down peers in Paris and London with it. It was also a poor day for oil producers, tracking spot crude prices lower.
There was some joy for JD Wetherspoon, however, as investors toasted a swing to annual profit.
The FTSE 100 index closed down 94.15 points, or 1.3%, at 7,405.45. The FTSE 250 lost 236.13 points, also sliding 1.3%, at 18,493.83, and the AIM All-Share ended down 7.02 points, or 0.9%, at 800.42.
For the week, the FTSE 100 added 1.0%. The FTSE 250 edged up 0.1% though the AIM All-Share fell 0.5%.
The Cboe UK 100 lost 1.4% at 740.26, the Cboe UK 250 ended down 1.5% at 16,059.14 and the Cboe Small Companies fell 0.7% at 13,234.94.
In European equities on Friday, the CAC 40 in Paris and the DAX 40 in Frankfurt both ended down 1.7%.
Shares in New York were in the red. The Dow Jones Industrial Average was down 0.2%, the S&P 500 index down 0.3%, and the Nasdaq Composite 0.6% lower.
‘There has been a slew of reassurances this week from authorities around the world regarding the safety of their respective financial sectors. Despite this, banks’ share prices remained under pressure into the weekend. In the past few weeks, the pendulum has been swinging between concerns about banks in the US and Europe. This morning, this manifested itself in renewed jitters around European bank,’ analysts at Rabobank commented.
Deutsche Bank shares closed down 8.5%. The stock came under heavy selling pressure following a rise in the cost of its credit default swaps, a form of insurance for bondholders against a potential default.
The rising CDS price suggests investors are concerned about the possibility of a default. Nerves were already jangled after events at Credit Suisse, which led to a hasty buyout of the bank by compatriot UBS.
The Credit Suisse deal left AT1 bondholders out of pocket. Perhaps in an attempt to calm bond market nerves, Deutsche Bank said it would redeem a tier 2 bond issue early. It had been due to mature in 2028.
‘Deutsche Bank has made the unexpected statement that it would redeem its tier 2 subordinated bonds in an effort to reassure its depositors. Nevertheless, a major sell-off in Deutsche shares occurred when problems with the yield on its AT1 bonds (a hugely popular asset class this week after Credit Suisse’s AT1 were marked down as part of the rescue plan) emerged,’ Zaye Capital Markets analyst Naeem Aslam commented.
‘The credit default swap index for banks jumped to a terrifying 173 points today. The CDS of this and other European banks are rising, which is an intriguing development. There hasn’t been a single event or development that can be pinpointed as the cause of the significant shifts in the DB’s CDS, but if this bank fails, Credit Suisse’s failure size will very much look like SVB’s collapse. This is because DB is too big to fail, and if this goes to a bailout situation, it will pave the way for many more in the very near future.’
Aslam continued: ‘The current level of credit default swaps for European banks is just a little lower than it was during the height of the European financial crisis in 2013. The current level is above the CDS reached back in the 2008 financial crisis. If these CDS do not normalise, it is highly likely stock market may continue to suffer for many days as a result of this.’
In London, shares in Barclays and Standard Chartered fell 4.2% and 6.4%. In Paris, Societe Generaleslumped 6.1% and BNP Paribas shed 5.1%.
The pound was quoted at $1.2222 at the time of the London equities close, down from $1.2325 on Thursday. The euro stood at $1.0753, lower against $1.0895. Against the yen, the dollar was trading at JP¥130.69, down slightly from JP¥130.73.
Shares in JD Wetherspoon jumped 14% in London, the best FTSE 250 performer. It swung to pretax profit in the six months that ended January 29. The pub chain also noted that supply and delivery issues have ‘largely disappeared, for now’.
Wetherspoon reported profit before tax and separately disclosed items of £4.6 million, swinging from a loss of £26.1 million in the equivalent period the previous year. Revenue climbed by 13% to £916.0 million from £807.4 million.
Chief Executive Tim Martin said that inflationary pressures on the pub industry have been ‘ferocious’, particularly in regard to energy, food, and labour. Nonetheless, he said, having experienced a ‘substantial improvement’ in sales and profits, the company is ‘cautiously optimistic’ about further progress in its current financial year.
‘Wetherspoons has been through plenty of ups and downs during its existence and always seems to be able to survive intact. Founder Tim Martin certainly isn‘