By Marc Jones
LONDON (Reuters) - A monster fine for Deutsche Bank compounded a miserable week for European stocks on Friday, while bonds bounced as weak U.S. retail sales figures triggered a pullback in Federal Reserve rate hike expectations.
News overnight that the U.S. Department of Justice had levied a far bigger than expected $14 billion fine on Germany's largest bank (DE:DBKGn) sent financial stocks across Europe (SX7E) tumbling amid worries others could also be clobbered.
Bank shares were on course for a weekly loss of more than 6 percent, their biggest since Britain's vote to leave the EU at the end of June. Europe overall (FTEU3) has also lagged the rest of the world, with market falls of almost 4 percent in Italy (FTMIB), Spain (IBEX) and Portugal (PSI20).
"With Deutsche Bank facing a $14bn claim against it in the U.S. for alleged irregularities in the way it sold mortgage securities before the financial crisis, you have to wonder if financial regulators are starting to do more harm than good," said ETX Capital analyst Neil Wilson.
"How can banks hope to move on from the crisis?"
Wall Street was also expected to reopen lower (ESc1) (1YMc1) (NQc1) although it was one of the few major markets still likely to end the week higher. MSCI's 47-country 'All World' index (MIWD00000PUS) headed for its fourth weekly loss in five.
The week's big anxiety that the low interest rate and mass money printing tactics of the major central banks might be losing their potency looked like it had been put on hold, however.
The difference between what investors demand to hold 10- or 30-year government bonds compared to short-term 2-year debt has been climbing sharply, but yields fell broadly on Friday after Thursday's lackluster U.S. retail sales data.
That also kept the dollar on course for a second week of falls against the yen as it dropped below 102 yen
"We had an unusually calm summer considering the Brexit vote and the U.S. political risk and I think we are now paying it back," said ABN Amro's Chief Investment Officer Didier Duret.
"With higher yields and lower equities it has felt like there is no place to hide... But for us this is a short-term move and there is no reason to panic."
The gap between both U.S. two and five-year note yields and 30-year bond yields
Futures traders are now pricing in a 12 percent chance of a U.S. rate increase this month, down from 15 percent on Wednesday, according to the CME Group’s FedWatch tool. Friday's consumer price inflation data is the next test for rates-focused traders.
CRITICAL SITUATION
Commodities markets saw wide divergences.
After a sharp jump on Thursday, Brent crude (LCOc1) slid 1.2 percent to $46 a barrel, extending losses for the week to 4 percent. U.S. crude (CLc1) retreated 1.1 percent to $43.39, poised to end the week down roughly 5 percent.
The resumption of exports from Libya and Nigeria and worries that U.S. rig counts would continue to rise fed the long-running theme of global oversupply.
Gold was steady at $1,314.64 <XAU=> an ounce, down about 1 percent for the week. Industrial metal nickel
Encouraging signals out of China's housing market and indications of a revival in its factory sector over the summer have stoked views that demand is quietly cranking up for the third quarter.
"Copper (has) continued to bask in the afterglow of this week's better-than-expected Chinese economic data," ANZ analysts said in a note.
Emerging market stocks (MSCIEF) were heading for their biggest weekly drop since May, a fall of 2.3 percent. Russia cut its interest rates for the second time this year.[EMRG/FRX]
Despite the broader easing of bond yields in Europe on Friday, there were still signs of strains in Portugal as worries about its finances pushed the gap between its bonds and those of Germany to the widest since February. [GVD/EUR]
Focus was also on a meeting of EU leaders in the capital of Slovakia as they gathered without Britain following the Brexit vote.
The euro was fractionally lower at $1.1222, and Britain's pound dropped 0.5 percent to leave it back below $1.32. [FRX/]
"The point is not to simply expect a solution to Europe's problems from one summit - we are in a critical situation - but rather it is about showing through actions that we can be better," German Chancellor Angela Merkel told reporters as she arrived in Bratislava.