It looks like we’re on the other side of the bank crisis and the euro is up five days in a row. What does that tells?
Deutsche Bank today delves into the question of whether the fallout from the crisis will linger longest in the US or Europe and argue that bank shares, CDS and deposit levels indicate that the US will be hit harder.
Firstly, American bank share prices have considerably lagged behind their European counterparts in recent months, with the latest market fluctuations exacerbating this disparity. Secondly, the persistent increase in funding costs has been more pronounced in the United States. In Europe, senior bank credit risk has almost entirely reversed its prior decline, whereas in the US, bank credit risk continues to be significantly higher. Lastly, banking deposits in the US were already experiencing a sharp downturn prior to the recent shock, whereas European bank deposits have maintained greater stability. This suggests that the disturbance in the US financial sector is more widespread, deep-rooted, and pre-dates the volatility seen in the past few weeks.
“All of the above is supportive of our view that a peak
and turn in Fed tightening will likely happen before the ECB. Related to this,
a flip in US curve moves from flattening to steepening is one of the most important indicators we have used as a bearish signal for the dollar.
Our fixed income colleagues have overnight recommended a
US curve steepener for the first time in more than three years.”
DB doesn’t talk about levels for the euro but a rise above the Feb 13 high of 1.0778 would clear the way for a test of 1.10. Of course, what happens next is in the Fed’s hands.
