Why Deutsche Bank Isn't Lehman Brothers
Why did Deutsche Bank affect markets?
Last week, concerns about one of the world's largest banks caused investors to worry that a new "Lehman moment" might spark a new financial crisis.
Germany's scandal-prone banking giant is facing financial penalties in the U.S. for the role it played in the financial crisis; the bank's problems are causing key clients to distance themselves and analysts wonder about the firm's financial health. Investors reacted to Deutsche Bank's woes negatively, setting off a 200- point drop in the Dow Jones Industrial Average on Thursday.
A similar loss of confidence in Lehman Brothers in 2008 caused counter parties (major clients) to ask the cash-strapped firm for their money back, triggering its collapse and accelerating the financial crisis. However, Deutsche Bank is not Lehman, and the world is a different place than it was in late 2008. International financial institutions are not as dangerously interconnected as they were then, and global regulators are much better positioned to respond to situations that arise.
Markets agreed with that assessment and rebounded on Friday. While news from Deutsche Bank may still create headlines, it is likely the worst has passed.
What does the data say about the economy in the third quarter?
With the third quarter officially in the rearview mirror, analysts are turning their attention to the data. Here's what we know so far:
The third estimate of second-quarter economic growth showed that Gross Domestic Product (GDP) grew a stronger-than-expected 1.4%, up from initial estimates. Even better, some economists think the economy could have accelerated and grown 2.8% in the third quarter, which would put it closer to the healthy pace needed in the U.S. The latest September data on consumer sentiment, an important indicator of future consumer spending, shows that Americans are more confident in their financial prospects, possibly opening the door to higher spending in the critical holiday shopping season.
What might the final months of the year bring?
As we enter the final three months of 2016, markets are contending with some headwinds we're watching. We can expect plenty of headlines around the presidential election as we get closer to November. Political beliefs aside, elections represent a lot of uncertainty, regardless of who the candidates are. Markets may react with relief after election uncertainty resolves; however, concerns about the changes a new administration will bring may also trigger further volatility. Either way, eventually markets will re-focus on the economy and corporate earnings.
Britain's prime minister announced her intention to begin negotiating the UK's exit from the European Union next spring. By 2019, Britain could be a sovereign nation once again, bringing a slew of changes to the EU. Though we don't expect to see too much volatility around the Brexit until next year, it is a political football that could roil markets.
Oil prices might have finally hit bottom and be poised to rally this fall. Major oil producers, including Saudi Arabia and Iran, seem ready to coordinate production to bring oil prices back up. If a pact is made (and held), oil could head back toward past levels next year, which would bring relief to beleaguered U.S. energy companies. However, higher oil process could bite consumers by making gas more expensive at the pump. It's likely that oil prices will play a role in market movements in the weeks to come.
As always, we'll keep you updated.