Good morning — We’ve had one heck of a two-day Dow rally, and it’s tempting to say “All is well.”
But this market has a major Achilles’ Heel, and it’s the Euro-banks. The International Monetary Fund just warned of significant financial contagion risk, saying that “Deutsche Bank appears to be the most important net contributor to systemic risks, followed by HSBC and Credit Suisse.”
It went on to warn that the German and U.K. banking systems have the “highest degree of outward spillovers” — meaning problems there could infect the global banking system with massive, uncontrollable losses just like we saw in 2007-2009. Here’s the WSJ story on the topic.
Not only that, but DB’s U.S. banking unit also just failed the Federal Reserve’s latest Comprehensive Capital Analysis and Review (CCAR), or “stress test.” The Fed wasn’t convinced Deutsche Bank could measure risk effectively, so failed the firm for the second year in a row.
Last time there was a major credit and banking crisis, it was our banks at the center of it all. This time, it’s clearly the major banks in Europe. So keep an eye on stock tickers like DB, HSBC, CS, UBS, RBS, BCS, and SAN. These stocks barely bounced during the Dow frenzy over the last 48 hours, and if they really go pear-shaped, I don’t see how the broader markets hold up.
