TradeTheNews.com Weekly Market Update: Cyprus
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.
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