The plunge in Deutsche Bank shares on Friday, and spike in CDS, came with no apparent catalyst, other than vague concerns around ‘contagion’ from Credit Suisse and US regional banks. But the lack of a coherent narrative for Friday’s selling may be a first sign that banking fears are receding.
The baseline scenario is that bank lending standards will tighten considerably. This will slow growth or put the US in recession. Markets are pricing in substantial Fed cuts (the 2-year Treasury yield dropped to 3.76% on Friday). But this view is so widespread, it risks becoming complacent.
Commodities markets may be heading for a renewed bout of volatility. Trafigura is forecasting copper prices will hit a record high this year. A ‘disorderly transition’ looms for energy. OPEC is back in control of world oil markets, according to a number of industry executives. And China is in control of the renewables supply chain. The Global Wind Energy Council has warned of a major supply crunch facing the sector this decade.
The pandemic reinforced the view that authorities will always be there to backstop the market. Constant government rescues place the burden of risk on taxpayers. It is not possible to regulate all the risk – it must migrate somewhere. Treasury yields could start to climb again, to reflect the additional inflation risk premium that must be priced in. Equities could continue to languish. Scrutiny of leveraged private markets will grow too, particularly if Treasury yields begin to climb again.
