October 12th, 2011
04:59 PM GMT
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London (CNN) – You know things are bad when an email like this lands in your inbox:

Subject: is it time for a quick catch up?

Before the world expires…

The message takes on a new meaning when you realise it’s from the former head of one of the UK’s larger financial services companies.

As the eurozone crisis rages seemingly without end and big banks are being bailed out again, many are bracing themselves for a return of the pronounced recession that characterized the end of the last decade.

But is there evidence to support such a claim?

Economists at Deutsche Bank have done much of the number crunching for us. In a comprehensive presentation sent to clients this week, the lender’s research team put forward some sobering predictions.

Deutsche advises clients to brace themselves for the following:

-a mild recession in Europe

-no recession in the U.S. but anaemic growth nonetheless

-emerging markets growth will continue to "hold up well"

-the resolution of the eurozone crisis is likely to be "long and volatile"

Meanwhile stocks are looking cheap

Deutsche notes that stocks are looking increasingly cheap following the recent months of market turmoil with companies listed on the S&P 500 trading at a price of 12 times earnings versus 17 times earnings after the dot-com bubble burst in 2001-2002.

Having said that, shares haven’t fallen as much as they did 10 years ago when on average those on the S&P halved in value overnight.

So far so good. That is if you can cope with the volatility.

With trillions wiped off the world’s equity markets and 4% to 5% daily swings for the DAX, CAC40 and even the Dow, you’d be forgiven for thinking recent times have been historically volatile.

Yet the erratic movements again of the broader index –the S&P 500- as measured by the volatility index – or VIX- show that volatility peaked at 81 percent in 2008. So far this year we have only reached 48 percent. Mind you, volatility in European equities has been substantially higher.

Yet moving through the asset classes towards credit, the uncertain picture becomes more bleak.

The cost of insuring eurozone debt as measured by credit default swaps shows investors are pricing in what Deutsche calls "extreme" levels of default for the bonds of Europe’s banks and governments. Precipitating this situation: the fact that banks are increasingly wary of lending to each other.

Having said that, as long as the European Central Bank continues to make dollar funding available, Deutsche reckons it's unlikely the money markets will once again become as tight as they were during the credit crunch.

So credit is still out there to be had. But what about rates?

Across the eurozone Deutsche analysts estimate rates could come down by a quarter of a percent in November and at some point in the first quarter. Outgoing ECB President Jean-Claude Trichet was widely criticised for hiking rates too soon. His successor Mario Draghi takes the helm at the start of next month and may well want to make an impact.

As for the Fed, while the markets have concluded a third round of quantitative easing is now only a remote possibility, we could see a repeat of its ‘Operation Twist’ to bring down long-term interest rates.

Following the Bank of England’s surprise round of quantitative easing this month, Deutsche says we could well see another £50 billion being made available by February, though rates will stay on hold well into 2013.

It’s hard to say whether we are going back to our most recent recession.

The 2008-2009 financial crisis should have provided valuable lessons for world markets and leaders alike. Still, as any investor will know the small print on that prospectus always warns you that 'history is no guarantee of future returns.’



soundoff (8 Responses)
  1. candy26

    Why isn't Goldman Sach's involvement with Greece being scrutinized?

    October 12, 2011 at 10:20 pm |
  2. US Senate

    After the US Senate approved the currency manipulation bill against China, a trade war is coming soon and that means another Great Depression is coming soon because protectionism is what aggravated the US economy in the 30s. Thus, Deutsche Bank is wrong.

    October 13, 2011 at 1:29 am |
  3. 1alan1

    We were able to avoid a recession by directly going into a depression.

    October 13, 2011 at 4:08 am |
  4. Davis

    Its a failing of Capitalism,Just socialism those banks and , or Let some company die.Keep bailing out is not only option for this kind of situation.Hellow MR President Obama, come out with the NewWay, you are such a talkactive, easily can win the election.But get the country back in track is Not a easy as u say, u tried but failed, just let other give a chance.

    October 13, 2011 at 5:05 am |
  5. petey

    on paper, we've been in a depression for awhile now.

    October 13, 2011 at 6:18 am |
  6. Hank

    First of all: Could we please stop saying "Deutsche says this and that", "Deutsche advises" etc. The Name of the Bank/Company is Deutsche Bank, not Deutsche. Deutsche means Germans. So, in this article it says "Germans advises", which isnt correct. its like calling Bank of America "America".

    October 13, 2011 at 8:00 am |
  7. Minecraft Deutsches

    You've made some decent points there. I checked on the net for more information about the issue and found most individuals will go along with your views on this web site.

    June 3, 2012 at 4:35 am |

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