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Round Up – German Banks, Irish Bonds & The Euro

James Boston
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European markets are recovering today after yesterday’s lower closes. A 5.4% fall in Deutsche Bank stock dragged markets down following the surprise announcement from this financial institution of a Q4 2013 loss of €1.153bn. Deutsche Bank is believed to be one of the healthier German banks and this result is naturally concerning for the sector. Digging deeper however shows these losses to be largely one off costs relating to balance sheet restructuring, litigation issues and regulatory compliance obligations. 2014 will be a tough year for Deutsche Bank and it’s peers, this short term pain however should lead to the emergence of a stronger German banking sector in the medium term.

‘Green shoots’ are beginning to emerge in the Eurozone’s periphery economies as Irish 10yr government bond yields reach an eight year low. Prompted by a ratings upgrade by Moodys from ‘junk’ to ‘investment’ grade, these key bond yields traded as low as 3.271% on Monday, a far cry from the near 15% peak in 2010. Ireland is the first European country to successfully exit the EU/IMF bailout program, austerity has been socially devastating on this country over the past 5 years but the progress made has set a template for other troubled Eurozone countries to follow.

Despite such positive news from the periphery Eurozone economies, the Euro itself has been under pressure for the past couple of days. True, Deutsche Bank’s news didn’t do much to help the single currency but it is more likely that the recent short term falls are technical in nature. Twice in the past 4 months EURUSD has tried, and failed, to break through the key 1.38 level, in the process re-enforcing this resistance point, the ongoing retreat from the latest attempt of a breakout is continuing to push this currency pair lower. In the absence of significant breaking news, there is no reason to see EURUSD pull out of it’s current trend towards the 1.34 support point.

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