Friday, March 22, 2013

Market Week Wrap-up  Weekly Market UpdateCyprus Reanimates Eurozone Crisis

- Events in Cyprus this week called into question the emerging consensus that the Eurozone crisis had been brought under control. Despite the awful economic data coming out of Europe and the complicated aftermath of the Italian elections, there had been a feeling that the worst was over and that the peripheral nations were making progress toward normalization. But after the Troika insisted last weekend that Cyprus accept a bail-in levy on bank deposits and the Cyprus parliament rejected the deal, there was a strong sense of deja vu in markets as analysts started discussing the chances of a disorderly bankruptcy. Outside of Cyprus, the data in Europe did not bode well: French, German and Eurozone preliminary manufacturing PMI data declined, in France's case to its worst level in nearly four years. In the UK, Chancellor Osborne unveiled the new 2013 UK budget, which he said would go further on monetary activism and fiscal reform (translation: more austerity). In the US, the March Philly Fed survey roared back to positive after February's big negative reading and the preliminary Markit PMI manufacturing number was pretty good. The FOMC decision saw no surprises, and in his post-decision press conference Chairman Bernanke stressed that the Fed will make adjustments to monthly asset purchases as needed, but not frequently and only in response to meaningful changes in conditions. Despite the chaos in Europe, US markets were close to flat on the week: the DJIA fell less than 0.1%, the S&P 500 was off 0.2% and the Nasdaq dipped 0.1%.

- The Cyprus situation is not exactly new: the small island nation had been relying on a €2.5B loan from Russia to cover its budget deficit since January 2012 and has been negotiating with the Troika for a bailout of its troubled banking system since last July. After on-again, off-again talks, Cyprus and the Troika reached a deal for a €10B bailout last Saturday, including a one-off bank deposit levy of 6.7% for deposits up to €100K and 9.9% for higher deposits. The disclosure of this condition ignited a political firestorm and pushed the parliament to reject the deal in a vote on Tuesday. Cyprus sought a better bailout package from Russia, including loan extensions, possibly in exchange for rights to natural gas assets, but the Russians refused. The ECB will cancel emergency ELA liquidity assistance on Monday if there is no deal, which would likely precipitate a Cyprus sovereign bankruptcy and the nation's exit from the euro zone.

- As of writing on Friday afternoon, negotiations have taken a turn for the better, despite reports that the Troika hiked Cyprus's contribution to the €10B bank bailout to €6.7B from €5.8B prior and demanded some form of bank levy. Most reports indicate that accounts of €100K or less will be protected from the levy. Unofficial statements from sources indicate a deal can be reached over the weekend, however we have heard this sort of talk before. Damage to the other peripheral nations has been limited so far: after rising above 5% earlier in the week, the yield on the Spanish government 10-year bond fell to 4.83% on Friday, while Italian 10-year yields dropped from a high of 4.63% to around 4.50% on Friday.

- Fedex, Oracle and Nike disclosed notable quarterly earnings reports this week. Shares of Fedex have lost about 8% since the firm missed Q3 earnings expectations and cut its FY13 guidance. Executives blamed the poor showing on customers shifting from air express to slower but less expensive modes of international shipping. Excess capacity overseas pressured margins. Oracle missed consensus estimates by a hair in its Q3 report and offered poor guidance for Q4. The firm's key new software sales slipped in the quarter. On the positive side, shares of Nike are up nearly 12% since the firm saw better profits and better margins in its Q3. Margins have been sliding lower for approximately two years and this was the first quarter of improvement.

- Declines in the euro were less bad than might have been expected given the developments in Cyprus. The biggest decline in EUR/USD came over last weekend, as EUR/USD dropped from 1.3075 to around 1.2880 early on Monday. On Tuesday EUR/USD dipped below its 200-day moving average around 1.2871 to test briefly below 1.2850, a level last seen in November 2012.

- The yen saw some profit taking after weeks of speculation about which policies the new BOJ Governor Kuroda would implement. Kuroda took the helm on Thursday and said all the right things at his first press conference. However, his remarks did not offer the market anything it wasn't already expecting. After trading as high as 96.75 last week, USD/JPY was trading below 94.50 on Friday.

- UK Chancellor Osborne presented the government's 2013 budget to parliament on Wednesday. GBP/USD saw plenty of volatility as the details came out, trading as low as 1.5050 and as high as 1.5180 on Wednesday morning. Osborne warned that the budget would go further on monetary activism and fiscal reform and also presented the updated BoE remit that confirmed the new 2% CPI target. GBP/USD pushed out to one-month highs by the week's end, easily shrugging off Fitch placing the UK's AAA rating on watch negative.