Deutsche Bank’s plunging share price has added to the financial market’s growing instability in recent weeks, as investors continue to hope for a swift settlement with the US Department of Justice (DOJ) that would allow the German lender to keep its head above water.
Investors have been closely following the Deutsche Bank saga, which reached a boiling point last month after the DOJ fined the bank $14 billion for mis-selling mortgage-backed securities during the subprime mortgage crisis. The penalty is roughly half the company’s total reported revenue and more than twice its full-year operating income.
Global markets received a boost on Friday after The Wall Street Journal reported that Deutsche was nearing a $5.4 billion settlement with the DOJ. Deutsche share prices spiked 14% on Friday, reflecting investors’ optimism that a deal was near. By Monday, it was clear that no deal had been reached, leaving investors to wonder about when a possible settlement might be reached.
The uncertainty weighed on US stocks, with the benchmarks S&P 500 and Dow Jones Industrial Average both declining after strong gains in the previous session.
Market participants are now wondering whether the German government will actually muster up the courage (and political backing) to bail out the beleaguered bank. However, Germany has made it abundantly clear that state aid is off the table, and has demanded that its pan-European counterparts do the same. After all, Europe is currently mired in several banking crises, including Italy, which is home to about a third of the Eurozone’s bad debts.
After a rough month of September, investment circles will probably remain skittish until some kind of clarity emerges from the region’s banking dilemma. Deutsche Bank will continue to be at the centre of speculation.
The Deutsche dilemma has triggered swift selloffs in bank shares. On Wall Street, it has also contributed to record volatility trading, with VIX futures volumes spiking. Investors may be banking on volatility, but they haven’t moved to precious metals or other so-called risk-off assets just yet. At the time of writing, gold prices are trading at more than two-week lows, partially due to a stronger US dollar. The US currency might become a more attractive option toward year-end as the Federal Reserve edges closer to raising interest rates.
Regarding Deutsche, investors are betting on a settlement far below the DOJ’s proposal. Any indication that Deutsche will actually have to pay anything close to $14 billion could sound the death knell for the stock, which is already trading near record lows.
 Research Team (October 4, 2016). “10 Things Investors Need To Know About Deutsche Bank AG.” Economic Calendar.
 Georgi Kantchev (September 30, 2016). “Deutsche Bank: What to Know.” The Wall Street Journal.
 Sam Bourgi (October 3, 2016). “DJIA Today: Dow Futures Begin Fourth Quarter in the Red.” Economic Calendar.
 Jennie Strasburg and Aruna Viswanatha (October 2, 2016). “Deutsche Bank, U.S. DOJ Continue to Discuss Mortgage-Securities Settlement.” The Wall Street Journal.