Just when we intended to put the bank collapse, fear behind us, another victim seemed to arise. This time, Deustche Bank is the target. Shares of the large bank collapsed after a jump in the bank’s credit default swap (CDS) that hit a four-year high.

You might ask, what is exactly a CDS? In basic terms, it is a product that plays the role of insurance for corporate bonds. In this case, you make a small fee when you buy a CDS. The seller of this CDS will pay you if the company cannot repay its bond. The unique thing about CDS is that the buyer does not need to necessarily hold the corporate bond to buy the CDS or receive payment in the event of the bond default.

Ripple effect across major banks in Europe

Deutsche Bank is essentially Germany’s largest lender. The shiver sent a cold chill to the regional banks’ equity as we saw the Euro Stoxx Bank Index (SX7E) fall sharply by 5%. BNP Paribas, France’s renowned bank, also suffered a 5.8% drop.

The current flare-up of bank worry from the US to Europe has undermined investors’ confidence. The same holds for my S&P 500 holdings, which cannot move decisively higher due to the banks dragging the index.

Is Deutsche Bank truly the next in line to collapse?

Many analysts had quickly dismissed Deutsche Bank’s collapse as a threat given that it has been churning out decent profits for the past consecutive quarters, and its liquidity and cashflow positions are highly healthy.

Yet, markets are looking for the next threat, while investors are figuring out what’s happening. Perhaps, there are undercurrent troubles that retail investors like us are unaware of. What is certain is the fear of perfuming US regional banks stocks that suffered large losses.

This comes even as Yellen reassured the market that emergency actions tool remain open for deployment should the situation renders its need. Yellen also called for an unscheduled meeting on Friday with the Financial Stability Oversight Council.

Damage to funding is clear and significant – Equivalent to a rate hike?

As Uncle Powell hints at the significance of recent market unrest as a potential rate hike that tightens monetary conditions, it now appears to be the case. Analysts are now seeing signs of rising prices in the selling of bonds to raise funds.

As the spreads wider, it could result in a higher cost for banks to pay for their operation. The uncertainty also contributes to volatility; few investors tend to hold on to the positions for an overnight trade.

Already, market participants are trying to factor in the possibility of a rate cut, but this could be too early a call to be made unless we see a meaningful decline in inflation metrics and signs of the economy cracking. Till then, we remain nimble in our trades as we repair the recently realised loss.

I hope you have a re-charging weekend.