Good Morning, and welcome to the new weekly economic report of the Lennon Wall. Every Tuesday, we will publish a short summary of the most significant, or at least some of the most significant, economic events of the previous week. Each week we will have a look at how the markets open on Mondays.
On Monday, October 3, a lot of attention was paid to the opening of Deutsche Bank shares that had been targeted by speculators during the previous week. In September, it was announced that the German bank would have to pay a fine of $14 billion for their roles in the subprime mortgages crisis of 2008, spreading panic among investors and account holders as speculation on whether the bank had enough capital to survive. The shares dropped at least eight percent after the news spread. However, during the week the fine was rumored to be lowered to just less than $6 billions, and on Friday evening the value of Deutsche shares rose, and so it did during Monday.
The fear of another Lehman spread during the week, yet the German chancellor Angela Merkel (who is facing hard times in Germany as the SPD party loses consensus) announced that no bail-out option was planned. Many hedge funds decided to short against Deutsche (e.g. bet against the value of the stock, buying insurance that would grant a profit as soon as the share dropped), increasing panic and lack of confidence. Deutsche reassures they have enough capital to absorb losses and pay their creditors. On Friday, Deutsche CEO yet failed to reach an agreement with the US Justice Department in Washington, we shall see what this will lead to during next week. On Monday, the October 10, the share opened at $13.73, up $2.25 from its record low $11.48 at the end of September.
At the beginning of the month, on October 1, the International Monetary Fund announced they would add the Chinese value, the renminbi, to the SDR basket – an elite international reserve asset, joining the dollar, the british pound, the yen and the euro. It really is an exciting milestone as it proves that China’s reforms to give the country a free market economy have been effective. Last year, Beijing allowed the RMB to fluctuate for three days based on classic supply/demand theory (with catastrophic consequences) and has later opened its domestic foreign exchange market to the world. This comes few days before the traditional annual IMF meeting in Washington, from October 8 to 9, that was undoubtedly dominated by Brexit, Greece and Deutsche Bank.
On Wednesday, rumors have leaked that the European Central Bank is considering to taper its quantitative easing programme, quickly causing turmoil in the markets. Currently, the ECB is spending $80bn every month purchasing corporate and government bonds in an effort to increase money supply and stimulate the economy. This was, however, later denied by ECB spokesman Michael Steen in a tweet.
On Friday, October 7, markets and traders were shocked when the pound dropped 6pc within minutes, to $1.1841, due to causes not yet certain. Some say the drop was probably caused by “fat fingers” errors that then triggered massive sell-outs of the british currency. The sudden drop almost brought the Euro currency to pair with the Sterling, to a level close to the one reached during the aftermath of the 2008 financial crisis.
Twitter shares went down about 11 percent on Monday while the social network with at least $2 billion deficit is still struggling to find a willing buyer (the list included Alphabet Inc’s Google, Disney, Salesforce.com, some suggested Amazon.com should aquire the social network).
We have seen several economic turmoils during past week, and expect further developments during the next one. Greek’s efforts to reform its broken economic system have been appreciated by the European Commission, and, to an extent, by the International Monetary Fund. Germany’s bank crisis, while potentially disastrous, is giving a chance to reopen european discussions on financial and economic reforms, as even the strongest player in the Union has shown weaknesses. A month from now, the United States will elect a new president, and we shall see what effects the new leader of the (still) largest economy in the world will have on the global economy and on the markets. At the beginning of December, Italy will be holding a referendum on a constitutional reform, and a rejection of the reform would most likely mean an unrecoverable loss of confidence in the third largest economy in the Union.
We will be online again next week, on October 18. Please comment all your concerns and suggestions and help us get better!
Photo courtesy of Flickr user Justin Pickard