Week ahead: Deutsche Bank fears on hold as all eyes shift to US inflation

There is some good news to start the week, no global bank failed or had to be taken over to start the week, which makes a difference from recently. There were fears on Friday that German behemoth Deutsche Bank would need some help after a sharp selloff in their stock price and a jump in their CDS spreads. However, anyone (or any algorithm) that was looking for Deutsche to collapse after the 15% drop in its share price last Friday were sorely mistaken, the market has digested various reports that suggest the selloff in DB was unjustified and did not warrant an extension at the start of this week, instead, the DB share price is higher by more than 2% at the start of a new trading week, although it had earlier jumped by more than 5%. Looking ahead, we expect the markets to remain on edge, although there have been some developments that could calm traders and concerns about the banking sector as we move towards the Easter holidays.

Waiting for the recovery rally

Who or what caused the panic around DB last week we will leave for others to figure out. Although it is a very large bank with a history of problems and it does have a large exposure to US commercial real estate market, it has been on a turnaround plan for a number of years and the bank is profitable. Also, it is trading at a fraction of book value, thus, DB looks safe to us, and there could be a period of recovery due for the bank. European banks continue to look attractive from a valuation perspective, and 12-month forward PE ratios are back at crisis era levels, thus, they could experience a broad-based recovery in Q2. Also, smart money is aware that the losses can be huge if you miss out on the start of a recovery rally, thus if the market looks like it is stable, then we could see momentum build on the upside in the coming days and weeks. European equities have opened higher at the start of the week, and US stock index futures also point to a higher open.

Added to this, after last week’s central bank fest, there is a period of relative quiet with no threat of higher borrowing costs for the immediate future. Elsewhere, these are the three events that we are watching this week.  

1, Andrew Bailey speech: Tuesday

The market will be listening closely to Andrew Bailey after the BOE raised interest rates by 25 basis points at the end of last week. Is this the peak for UK rates, as some had expected, or will there be more to come? Since the next BOE meeting isn’t until May, we expect Bailey to remain neutral and talk about incoming data being the main driver of future monetary policy. However, any emphasis on the prospect of rapidly falling inflation from the summer onwards may trigger hopes that rates have reached their peak. If that is enough to boost the FTSE in general, we will have to see. But a dovish hint in his words could see homebuilders and UK consumer discretionary benefit, while the pound could take a dive. GBP is losing against the dollar at the start of the week, as the 2-year Treasury yield rises by 12 basis points. Volatility in the US sovereign debt market has not gone away, although we believe that this is down to the purchase of SVB by First Citizens Bank in the US, which is calming the mood towards banks on both sides of the Atlantic. If this calm remains, then we could see banking stocks recover in the coming days and US Treasury market stability return.

2, Next earnings: Wednesday

Even if you don’t trade stocks, you want to watch UK earnings this week. Next is a consumer bellwether in the UK, and it is a good read of the UK middle classes’ spending on discretionary goods. We will be watching to see how they performed at the start of this year. This is also their year-end, and last year is expected to be strong, so the focus will also be on their expectations for the year ahead. Are they seeing lower footfall in their stores as people save their money? How is online doing? We also want to know what their inflationary pipeline is looking like; in their last update they said that inflation should peak in the summer. If this message is reiterated, it could help boost expectations that inflation will fall rapidly in the second half of this year. It’s also worth watching Ocado, when it reports results on Tuesday. This will be useful to know how the tie-up with M&S is going and if demand remains strong, and consumers continue to buy higher-end groceries, even with the cost-of-living crisis.

3, US PCE: Friday

The latest US inflation data is probably the most important as it’s the Fed’s preferred measure of price growth for the US economy. The PCE data for February is expected to show that prices remain stable at 4.7%, with the monthly rate of growth expected to come in at 0.2%, down from 0.6% in January. This is the type of monthly increase that the Fed can most likely live with for now, although monthly price growth needs to be in negative territory for annual price growth to fall back to 2%, the Fed’s target level. However, considering how much inflation has been in the system in the last year, the Fed should be happy with this. If PCE comes in line with expectations, then we may see stocks rally, and the dollar and Treasury yields fall back slightly. However, we expect moves to be moderate, especially for Treasury yields, due to the recent bout of extreme volatility in that market. The University of Michigan consumer sentiment survey also releases its final reading for March, the market will be focussed on whether sentiment fell further this month, which could be the first decline in four months, due to worries about persistently high inflation. Also watch long term inflation expectations, which have been remarkably stable so far.