Deutsche Bank will likely cast a pall over equity markets nextweek as the largest German lender navigates a possible multi-billion dollar settlement with the U.S. Department of Justice over the sale of mortgage-backed bonds.
Deutsche shares traded in the United States hit a record low on Thursday, falling as much as 24 percent since the DOJ asked the bank to pay $14 billion to settle charges related to its sale of toxic mortgage bonds before the financial crisis.
But the stock had its best day in five years Friday, on record volume, after news agency AFP reported that Deutsche was nearing a much-lower $5.4 billion settlement with the DOJ.
Analysts at Morgan Stanley estimated Deutsche could pay about $6 billion to settle with the DOJ.
Stocks on Wall Street broadly tracked Deutsche over the past few days and will likely continue to do so, analysts say.
"While it is in the headlines, it is an overhang," said Art Hogan, chief market strategist at Wunderlich Securities in New York.
"Once they come to some resolution on the difference between what they are charged, $14 billion, and what they are going to pay, call it $5 or $6 billion, the market is going to be afraid there is a problem," Hogan said.
Deutsche's market capitalization of near $18 billion makes it much smaller than its U.S. peers like Bank of America , at $155 billion, or Citi, at $133 billion.
However its trading relationships with the world's largest financial institutions make a potential breakdown at Deutsche a bigger risk to the wider financial system than any other global bank, the International Monetary Fund said in June.
"Its world print and eurocentric role are unrivaled, so it is going to drive the narrative nextweek," said Peter Kenny, senior market strategist at Global Markets Advisory Group in New York.
"My sense is we're not really going to have the kind of clarity that investors like to have ... for probably weeks."
AFP reported, citing a person familiar with the matter, the settlement could be announced in the next couple of days.
Analysts stopped short of comparing the present turmoil at Deutsche to the bankruptcy of U.S. investment bank Lehman Brothers in 2008, part of a financial crisis that triggered the deepest recession in decades for the U.S. economy.
"Deutsche Bank is not Lehman and does not threaten a 2008-like 'sudden stop' to the global economy," said Mohamed El-Erian, chief economic adviser at Allianz.
The concern, he said, lies in this being "a reminder of the fragility of some European banks" and an additional headwind to European growth.
The S&P 500 rose for the week but the index's banks , suffered big losses, as a group, on Monday and Thursday because of the turmoil surrounding Deutsche Bank. Separately, the grilling of Wells Fargo's chief executive in Congress over fraudulent business practices also weighed on bank shares.
Frankfurt's stock exchange will be closed on Monday for the Day of German Unity.
Equity investors will also focus next week on the 10 speeches by top U.S. Federal Reserve officials, with the highlight from Vice Chair Stanley Fischer on Friday, and clues to monetary policy. Key economic data, including September's employment report on Friday, will keep traders on tenterhooks.
"We got our own troubles here with the economy slowing down, next week we'll know if (weekdata) was a blip or a trend," said Phil Orlando, chief equity strategist at Federated Investors in New York.
He added: "The market has to have a healthy respect for the downside in the event the DOJ and Deutsche don't find a reasonable agreement."
(Reporting by Rodrigo Campos; additional reporting by Jennifer Ablan and Chuck Mikolajczak; Editing by Daniel Bases and Cynthia Osterman)