Deutsche Bank’s predicament dominates Europe in September


Europe briefing

European markets were overshadowed during September by concerns over the financial health of Germany’s Deutsche Bank, which was hit with a US$14 billion fine by the US Justice Department.

  • Deutsche Bank’s shares lost over 20% of their value during September
  • Inflation remained a headache for ECB policymakers
  • Switzerland was named the world’s most competitive country by the World Economic Forum

During September, European markets rallied in the wake of the US central bank’s decision to leave its key interest rate unchanged. Nevertheless, although US monetary policy remained a focus for investors in September, developments at Germany’s Deutsche Bank absorbed much of their attention during the second half of the month.

Policymakers continue to monitor developments in inflation… and remain ready to take action.

Shares in Deutsche Bank lost over 20% of their value during September amid fears over the bank’s financial health. The US Department of Justice announced it was fining Deutsche Bank US$14 billion over the mis-selling mortgage-backed securities in the run-up to the financial crisis. In response, Deutsche Bank said that “the negotiations are just beginning”. Amid reports that some hedge funds had withdrawn money, Deutsche Bank’s CEO John Cryan described concerns as “unjustified” and highlighted the company’s “strong fundamentals”. Deutsche Bank’s share price subsequently rallied slightly at the end of September on hopes that the US fine might prove smaller than initially expected.

Although the Dax Index ended September only 0.8% lower, this relatively muted monthly drop masked the daily volatility created by concerns over the banking sector. Within the chemicals sector, German company Bayer announced a US$66 billion takeover of US agriculture firm Monsanto. Elsewhere, France’s benchmark CAC 40 Index crept 0.2% higher during September.

The European Central Bank (ECB) kept its key interest rate at zero for another month during September and maintained its programme of asset purchases. According to ECB President Mario Draghi , policymakers continue to monitor developments in inflation very closely, and remain ready to take action. The ECB’s target rate for inflation is 2%, whereas the eurozone’s annualised rate of inflation is expected to have risen from 0.2% in August to 0.4% in September. In comparison, the ECB predicts an annualised inflation rate of 0.2% this year and 1.2% next year.

Six of the ten most competitive countries in the world are European, according to the World Economic Forum (WEF) Global Competitiveness Index . Switzerland is the most competitive country of all, followed by Singapore and the US. The Netherlands is fourth, followed by Germany, Sweden, and the UK, with Finland ranked in tenth place. In its report, the WEF warned that insufficient competitiveness will hold back global expansion and that the unconventional monetary policy adopted by some central banks in the wake of the financial crisis has not been enough to kick-start growth.