TD Securities (TDS) analysts are expecting a slump in the German ZEW Expectations Index which looks six months ahead and is primarily viewed as a leading indicator for the Ifo Business Climate Index. The ZEW measure of market sentiment shows Deutsche Bank is beginning to drag European banks down with it as the industry faces the prolonged shock of a banking crisis on the horizon. Concerns regarding the bank’s ability to pay coupons on its CoCo bonds, and also due to the bank’s credit default swaps (CDS) to hedge against the risk of credit default, which hit an all-time high last week before easing slightly. Furthermore, it is believed that the new bail-in rules, which commenced this year, have increased anxiety among these new securities this year.
The current bail-in rules allow a bank to continue as a going concern by ensuring liabilities are written down or converted into equity, before a bank ends us in a resolution process. The main driver of widening spreads in the buy-side seem to be the minimum requirement for eligible liabilities and the fears of a bail-in on these instruments backing those securities. As reported, we may be witnessing the initial impact of these new securities classes as financial markets have already begun to absorb parts of the process.
According to analysts at TDS, they predict that the slump index will decline to -11, with the Bloomberg consensus at -10, down from 10.20 previously. They believe the decline will be driven by a number of reasons: falling oil prices, Asian markets uncertainty, disappointing Q4 GDP numbers and the ongoing migration crisis in the EU, all of which have dragged the German stock market lower without excluding any financial or economic factors. To support their forecasts, TDS are predicting the market to rise from 14 to 15.6 which reinforces their belief that the current adverse market sentiment will end soon. However, they believe it is highly likely the forward-looking Expectations Index will continue to slump as the German banking system falls further into distress, thus are forecasting a gain to -40, roughly in line with the consensus.