Major averages fell yesterday on higher, above average volume. The NASDAQ Composite has again dropped back below a prior range breakout point, the third time it has done so in the month of September alone. Meanwhile the S&P 500 has returned to the land down under its 50-day moving average. As the market shows some signs of instability here, members should review where their out points are for any existing positions should the selling continue. It is always better to have an exit plan in hand before things potentially get out of hand.
The economically-sensitive financial sector fell as shares of Deutsche Bank tumbled 6.7% after reports indicated that clients are reducing collateral on trades and that about ten hedge funds have reduced exposure to the German banking name. Deutsche Bank is the largest bank in Europe and its sizable derivative holdings make it a significant part of the global financial system. If a crisis at Deutsche Bank were to unfold, it would certainly reverberate across the global banking landscape. The emergence of negative interest rates are not helping as they erode profits between the bank's short-term borrowing costs and what they can charge for long-term loans.
Will DB become another Bear Stearns and Lehman? DB is far more interconnected than either Stearns or Lehman so they will argue DB is too big to fail. On the other hand, liquidity is more readily available today through various programs that were not in place in 2008, so one institution however large is unlikely to create a domino effect. Stay tuned for "Debt Destabilization and Destruction, Part 2" to find out if Triple-D Day on our global financial system looms.
Further fueling the selloff, a number of Federal Reserve officials called for a rate hike sooner than later. Philadelphia Fed President Patrick Harker (FOMC voting member in 2017) said that the Fed should raise rates sooner rather than later while Kansas City Fed President Esther George (an FOMC voter) continues to favor the removal of policy accommodation. Odds of an interest rate hike before the end of the year improved with the implied probability of a rate hike at the December meeting rising to 57.4% from yesterday's estimate of 53.1%.