Wall Street and FTSE struggle as Deutsche Bank sparks another banking sell-off

FTSE A woman cycles behind a London bus as they pass by a Deutsche Bank building in the City of London March 30, 2016.     REUTERS/Russell Boyce
FTSE and Wall Street investors appear unconvinced that enough has been done to fix the turmoil in the banking as Deutsche Bank plunges. Photo: Russell Boyce/Reuters

The FTSE 100 and European stocks finished lower on Friday after the Bank of England chief warned of further interest rate hikes if firms raise prices and banking turmoil persists.

The FTSE 100 (^FTSE) lost 1.25% to close at 7,406 points, while the CAC 40 (^FCHI) in Paris fell 1.74% to 7,013 points. In Germany, the DAX (^GDAXI) slipped 1.73% to 14,948.

Interest rates hike warning

The governor of the Bank of England (BoE) warned businesses risk fuelling inflation by continuing to increase prices.

Andrew Bailey warned companies that interest rates may need to be raised further if "all prices try to beat inflation".

Speaking on BBC Radio 4’s Today programme, he admitted that inflation had not yet eased, after it unexpectedly rose to 10.4% in February.

"I would say to people who are setting prices – please understand, if we get inflation embedded, interest rates will have to go up further and higher inflation really benefits nobody," he said.

"It hurts people and it particularly hurts the least well off in society."

Bailey said he had not seen evidence of companies putting up prices more than necessary but warned that policymakers would need to act if inflation looks likely to become "embedded".

Interest rates were lifted to 4.25% from 4% on Thursday after policymakers on the Bank’s nine-strong Monetary Policy Committee (MPC) voted seven to two for the quarter-point rise following a surprise jump in inflation last month.

"We’ve got to get inflation down. Inflation is too high at the moment. Now we think that it will fall sharply really from the early summer throughout the rest of the year. And we’re pretty confident about that," Bailey said.

Read more: Bank of England raises interest rates for 11th time to 4.25%

"But it hasn’t come down yet and we had some news earlier this week which was a bit higher than we expected it to be, there were probably some temporary factors in there. But there was a message in there that we’ve not got to the point where we’re getting the sharp fall that we expect.

"We weren’t expecting it immediately but we’ve got to see that happen. That’s my message, that’s what lies behind the [rate] increase [on Thursday]."

Chancellor Jeremy Hunt said he supports the Bank’s decision to hike rates further as “the sooner we grip inflation the better for everyone”.

Meanwhile, retail sales increased by 1.2% in February, following a rise of 0.9% in January (revised from 0.5%) although when compared with the same month a year earlier sales volumes were 3.5% lower.

Gabriella Dickens, senior UK economist at Pantheon Macroeconomics, said despite the rise in retail sales it was “too soon to claim that a recovery has taken hold.”

US and Asia

Wall Street pared losses in midday trading on Friday as markets cap off a bumpy week following the Federal Reserve's interest rate decision on Wednesday and further pressure in the banking sector.

The Dow Jones (^DJI) lost 0.30% to 32,009 points. The S&P 500 (^GSPC) slipped 0.30% to 3,937 points and the tech-heavy NASDAQ (^IXIC) fell 0.62% to 11,713.

US banking stocks were also falling, with JPMorgan (JPM) down 2.26% and Bank of America (BAC) slipping 0.61%, while Morgan Stanley (MS) tumbled 3.46%.

The US Treasury secretary will convene a meeting with the heads of the US's financial regulators on Friday amid the latest banking turmoil.

On Wednesday, the Fed raised rates by a 25 basis points, bringing the range for the fed funds rate to 4.75%-5%, the highest since October 2007, in addition to suggesting its aggressive rate hiking campaign to quell inflation was winding down.

"The committee anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time," the Fed said in its policy statement, doing away with language for "ongoing rate increases" in interest rates.

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In Asia, Tokyo’s Nikkei 225 (^N225) lost 0.13% to 27,385 points, while the Hang Seng (^HSI) in Hong Kong slipped 0.64% to 19,921. The Shanghai Composite (000001.SS) also lost ground, falling 0.64% to 3,265 points.

FTSE 100

Back in London, markets fell as doubts linger over the global banking sector, dampening risk taking in markets.

Barclays (BARC.L) lost 4.15%, NatWest (NWG.L) fell 3.21% and Standard Chartered (STAN.L) retreated 5.91%, with all three stocks among the five biggest fallers. Analysts at HSBC cut their price target on Barclays.

Banking stocks took a hit across markets as Deutsche Bank (DBK.DE) has found itself at the centre of another selloff in financial shares.

Nordea chief analyst Jan von Gerich told Reuters: "Underlying sentiment is still cautious and in this environment no one wants to go into the weekend risk-on.It’s very volatile and it’s too early to say things will calm down."

Deutsche Bank shares fell for a third day by as much as 15% and are currently trading 10% lower, after a sharp jump in the cost of insuring its bonds against the risk of default to a four-year high.

Susannah Streeter, head of money and markets at Hargreaves Lansdown, said: "Concerns are also deepening around Deutsche Bank after the cost of insuring against defaults on its debt spiked, with credit default swap prices soaring.

"Worries about contagion are again rearing up even though more deposits appear to have been flowing into the German lender since the banking scare erupted, and it is thought to have capital reserves well in excess of regulatory requirements.

"These fresh problems are bubbling up in a cauldron of worry about the implications of the rate rises we’ve seen over the past week, given that earlier hikes appear to have caused breakages in parts of the banking system.

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"There are worries that the fresh round of rate rises could make a precarious situation worse for some smaller banks, particularly those sitting on large bond holdings which have lost value as monetary conditions have been dramatically tightened."

Pound vs dollar

The pound (GBPUSD=X) lost ground after the Bank of England’s interest rate hike. Against the dollar, the pound slipped 0.5% and was heading in the direction of $1.22.

Sterling gained nearly 0.15% against the euro (GBPEUR=X), at €1.14.

Oil markets

Meanwhile, Brent crude (BZ=F) lost ground and was trading at around $74 per barrel, as recession fears continue to loom over oil markets.

Overall, oil prices looked set for a weekly rise of more than 3% on Friday as fears over further aggressive interest rate hikes from the US central bank faded.

Watch: Bank of England boss: Inflation 'far too high'

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