Daily Market Color

Volatility Increases on Bank Capitalization Concerns

US stocks and Treasuries both struggled for direction as investors assessed the global economic outlook following a volatile session for international equities.  Japanese stocks plunged 5.4% overnight, the largest daily drop since June 2013, on global growth concerns and renewed strength in the yen.  The rise in the yen is particularly troubling because it has occurred just a week after the Bank of Japan implemented a negative interest rate policy.  One would expect the opposite market reaction, which indicates central bank stimulus make be losing some of its effectiveness.  Japan became the first G-7 country to see its 10-year debt yields fall below zero, finishing the day at a record-low -0.035%.

Pessimism over the global banking sector has also driven some of the negative sentiment hanging over financial markets.  Bad loan balances at some European banks are rising and market-pundits are becoming concerned over bank capitalization.  Deutsche Bank in particular has been in the crosshairs since it reported its first year of losses since the financial crisis.  DB’s CEO John Cryan said the bank is “rock solid”, but both the bank’s stock and credit default swaps have been under significant pressure in recent days.

The US data calendar is light again, so markets are focusing on oil prices and headlines.  There are no scheduled Fed speakers ahead of Yellen’s testimony tomorrow, but there is supply in the form of a $24 billion 3-year note auction. 

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