Week Ahead

Marc To Market's picture

The focus remains squarely on Cyprus.  It seems to be overshadowing everything else.  However, the price action shows a disconnect--the euro itself has been fairly resilient, though lagging behind the recovery of sterling, the dollar-bloc.  Spanish and Italian bond yields fell last week and continue to slip today.   Although there are many who see Cyprus as trumping OMT, leading the disintegration of the monetary union, the global asset managers are not panicking by any stretch.  There is a sense of urgency, but not of emergency.

Just as the capital markets were mostly calm in the face of last week's Cypriot developments, there has been a relatively muted reaction to news that a deal have been struck which appears to avoid the worst of the potential contagions in three important respects.

First, the sanctity of small depositors was ultimately protected, though the willingness of Cypriot officials to sacrifice them and for the European officials to have gone along with the plan initially, will be remembered.  Second, the traditional seniority of claims has been restored.  Equity and bond investors, which had been protected under the initial proposal at the expense of insured and uninsured depositors, will now be "bailed-in".  Third, while uninsured deposit and others may see assets frozen initially, the more extensive capital controls that would have potentially led to treating the euros in Cyprus differently from euros elsewhere in the euro zone, have been averted.

Reports indicate that it may the next several weeks for the Cyprus plan to be formally approved and the country may not get its first aid tranche until early May.  The fact that the package was shaped in such a way as to make it unnecessary for approval from the Cypriot parliament, which had the courage to block the president's previous plan (that was endorsed by the Troika) raises questions of democratic legitimacy.   In addition, we suspect that the restructuring of the Cyprus economy away from its role as a financial center will be more expensive and a more prolonged process that currently anticipated, warns additional assistance is likely to be necessary.

Lastly,  Russia is unlikely to be pleased.  If we understand what Russian officials have been intimating, the problem is not about defending the Russian oligarchs' financial interest.  After all, the capital flight from Cyprus since the start of the year has been substantial and reports suggest there have been other ways to transfer wealth out of the country, such as equity transfers.  Rather the problem is that Russia was not consulted and included in the process.  We suspect that the same regime that locks up a punk rock band for criticizing it, will find a way to express its dissatisfaction with the EU and Germany.

Technically, the US dollar looks vulnerable.  The trend following and momentum segment of the market short foreign currency positioning is stretched, with the notable exception, arguably of the Australian dollar. The Aussie bulls have moved back into ascendancy amid an increased speculation that the RBA's easing cycle may be complete (we do not think it is).  The risk of a US dollar downside correction seems to dovetail with the approaching month end and quarter end portfolio and hedge adjustments. 

We do not place much significance on pre-weekend decision by Fitch to put its UK rating on negative credit watch.  It is the laggard among the top three agencies.  S&P has put its AAA rating on review this past December and last month, Moody's had cut its rating.  Fitch says it hopes to complete its review by the end of next month.  We think that what led to Fitch's review, the government's admission that it now projects slower growth and higher levels of debt, will lead to a downgrade in Q2. 

Separately, the service index is reported late in the week and, given the importance of this sector, a modest increase would be seen as a sign that another quarterly contraction has been avoided.  The first estimate of Q1 GDP is April 25. 

European economic calendar is fairly light.  The two features are consumption and money supply.  Germany will get the balling rolling  with its Feb retail sales report tomorrow. A pullback after the out sized 3.1% in January is expected. Italy reports retail sales on Wednesday, followed by France's report on consumer spending at the end of the week.  Thursday, the the ECB will report money supply and lending figures.  Money supply growth is expected to have slowed while lending likely continued contracting. 

US data is concentrated in the second half of the week.  Q4 GDP on Thursday is likely to show a further upward revision.  Recall the initial 0.1% contraction was revised to a 0.1% expansion--still stagnant.  Now, however, it is likely to be revised to 0.5% or a little higher.  It is not so important for the capital markets, but it is useful reminder that the first estimate of GDP is practically useless and that after that Q4 slowdown, the US economy appears to have bounced back to its recent pace of around 2%, if not a little above.  This will be driven home further with the personal consumption expenditure, which will show the resilience in the face of the end of the payroll savings tax holiday. 

Economic data may help spur further recovery in the Canadian dollar.  At mid-week Canada will report CPI figures.  Seasonal factors point to upside risks, but note that the BOC will also be unveiling new weightings for its consumer basket based on 2011 spending patterns; upgraded from 2009.  The core rate is likely to have continued to fall.  After peaking at 2.3% last February, it expected to be unchanged from the 1% pace seen in January.  It is below the lower end of the BOC's range and reinforces the neutral stance.   On Thursday, January GDP figures will be released and the economy appears to have bounced back after contracting 0.2% in December.

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Lordflin's picture

"however, the price action shows a disconnect"

Price action is disconnected because markets behave according to manipulation and not fundamentals. When the correction comes, and it must, as economics is really a very simple subject distorted into complexity by hubris, avarice, and the madness they breed, there will be a rush to fill a vacuum. I would not want to be standing in the path when that happens.

Cyprus was once destroyed by tsunami after a massive volcanic eruption on a neighboring island... Guess it is time for revenge. And the funny thing is, and you will have to admit there is some humor here, those so called financial elites, little more than parasitical, low-life, power corrupted lunatics, think they can gather up the smoke, stuff it back down the throat of the mountain, and cap it all of with wads of paper while the rest of the world, presumed by them to be nothing but ignorant sheep, looks on in disbelief.

I write fantasy, but even I don't have an imagination like this...

shinobi-7's picture

Not as bad as it could have been in the end... in the short term at least. And that's the real problem: Europe is moving from one pitfall to the next without solving anything.

The real question is: How could Cyprus be part of the Euro to start with? Anyone with some good sense knows that when you go shopping you cannot mix everything together: The eggs, the cans, the fish, a soap... You must wrap them up and arrange everything to make sure nothing wrong happens on the way back home. But somehow for economies which are infinitely more complex, no precautions are needed, it's all supposed to sort itself on its own as we move on. Well sure and here's the result: The steel can (Germany) is now at the bottom of the bag, The fish (France) is rotten, the eggs (Greece, Cyprus) are broken, the soap (England) is giving a bad taste to everything, etc... Good job!

Orly's picture

The USD is vulnerable here.

The Euro has made a nice, round bottom on the Daily, even in the face of tumult and catastrophe.  The Japanese fiscal year is about over and reepatriation gains into the yen will taper off considerably.  Abe and Kuroda come out and announce their plans to inflate the economy and I think the market buys it, with a lot of help from generalised "risk-on" euphoria. The risk-on trade should be good for all of April.

As the EURJPY rises, I bet the carry flows to come out of the Australian dollar.  So, get long EJ and short AUDUSD.  It will probably be one of the more "normal" trading weeks we've had in many.

Best of luck trading!


Iocosus's picture

I believe the Cyprus depositor confiscation was done with the Kremlin's blessing. The EU leadership would have been foolish otherwise to have targeted Russian deposits, as Russia is essentially the Slomin's for Europe and has the power to either shut off the valve or return the favor with a 40% hike in price. This was punishment for unpatriotic Russian savers and an example for all the others and is by no means any different from what the US is doing to their own (on top of the haircuts US savers realize by way of QEs 1-4 and beyond).

Fix-ItSilly's picture

Ohhh...  it remains sleight of hand.  With Liaki, seniority of claims MAY now be respected - but we have had no statements to derivative and special off balance sheet vehicle exposure.  Yesterday, the London Telegraph discussed British bank special vehicle exposure to Cyprus and it is substantial and still murky.

For the bank Laiki is folded into, more smoke and mirrors.  Traditional seniority of claims was NOT adhered to.  Depositors took it on the chin while bond and equity holders have gotten off.

Lastly...  and it goes to the root of the issue, who says Cyprus can pay off the new debt load.  Its #1 industry, one of only 2 (the other being tourism which is now impaired too), finance, is eviscerated.  Who really thinks this debt is going to be paid off?  GDP will crater.  Emigration will leap. 

The Troika has learned nothing from its Greece experience.

Can this deal make it to April Fools Day?

new game's picture

the train rolls down the track loaded with debt.

credit is the fuel

ready to deliver anti-liberty to all takers...

enjoy the day, i say

cause tomarrow might not be as nice...

Ghordius's picture

"The fact that the package was shaped in such a way as to make it unnecessary for approval from the Cypriot parliament, which had the courage to block the president's previous plan (that was endorsed by the Troika) raises questions of democratic legitimacy."

this has to be seen in the proper context, outlined by Marc's sentence before

"First, the sanctity of small depositors was ultimately protected, though the willingness of Cypriot officials to sacrifice them and for the European officials to have gone along with the plan initially, will be remembered."

without wanting to defend the IMF, their initial advice was to have an haircut on the +100 accounts (of the troubled banks only) of something like 40% - compare to the current resolution

it is indeed quite disturbing that in the closed meetings things slided the way where the Cypriot delegation - don't forget, headed by the freshly directly elected President of Cyprus and his British-Cypriot FinMin - had the gall to come back to Cyprus and propose the this deal in such a way that the Cypriot parliament would have had to vote on it because it would entail haircuts to the "less than 100" accounts - instead of the way the same parliament was previously fine with and passed a "yes" on

the question of democratic legitimacy is being hijacked by several parts keen on pushing their agenda - interestingly often by parties that have no interest in democratic legitimacy at all - except for using the epithets of "undemocratic" and "unelected" for disingenuos propaganda

word from the Cypriot parliament's opposition parties is that they are fine with the deal - and they look relieved about not having to vote on anything and push the current resolution in the realm of the executive power of the President and the governor of the central bank

consumers and cowards ain't citizens

andrewp111's picture

The original plan would have taxed the deposits of all the banks in Cyprus, including the healthy ones, in order to keep the insolvent banks open and the foreign deposits flowing. It was a desperate last-ditch attempt to maintain the Cyprus business model. The new plan simply resolves the insolvent banks, and does not require legislative approval. The new plan is what they should have done from the beginning, and if they had there wouldn't be all the storm and drang. And as Merkel said, the old Cyprus business model is gone.

Ghordius's picture

I'm not commenting on the merits of the plans - only on the "undemocratic" and "unelected" parts, particularly when used in propagandistic manner for agenda-pushing by people who don't care for elections or democracy per se

"Merkel said..." compare with what the French PM Moscovici said about "Cypriot casino banking economy"...

Imminent Crucible's picture

"First, the sanctity of small depositors was ultimately protected"

"sanctity protected"----not the way I would have phrased it. Laiki Bank is being liquidated, and its small depositors will get, not their money, but shares in Bank of Cyprus which is on life support. Look at how that worked out for the seven regional Spanish banks merged into Bankia: Depositors lost their life savings, but they did get shares in Bankia, now worth one euro cent each.

Further, small depositors in Cyprus also get the following blessings (from Reuters' Yiannis Mouzakis):

• Restrictions on daily withdrawals (100 euro maximum the last I heard)

• Ban on premature termination of time savings deposits (can't cash in your CD and take the "substantial penalty for early withdrawals")

• Compulsory renewal of all time savings deposits upon maturity (can't ever cash in your CD, it just rolls over)

• Conversion of current accounts to time deposits (all your money is now in a non-maturing CD)

• Ban or restrictions on non cash transactions

• Restrictions on use of debit, credit or prepaid debit cards

• Ban or restriction on cashing in cheques

• Restrictions on domestic interbank transfers or transfers within the same bank

• Restrictions on the interactions/transactions of the public with credit institutions

• Restrictions on movements of capital, payments, transfers

• Any other measure which the Finance Minister or the Governor of Cyprus Central Bank see necessary for reasons of public order and safety

So all those small depositors are now trapped on a small island occupied by Euro bankers, and facing a forced depression. Some "protection".

JOYFUL's picture

Things are looking upbeat! Marc has clearly found the resources to hire a spellchecker/editor, and his regurgitation of the latest slant on stuff as issued by President's Working Group on Financial Markets, aka Plunge Protection Team, aka Protocols of the Elders of Sion, has acquired a much more professional sheen...

unfortunately, the basic lack of all resemblance to life upon this planet remains ingrained in his presentation, and the continued reliance upon a parallel universe soundtrack to drown out the sounds of systemic collapse bodes ill for his continued presence here...

unless money talks...more loudly than truth!

"We suspect that the same regime that locks up a punk rock band for criticizing it, will find a way to express its dissatisfaction with the EU and Germany."

I suspect that the same regime which locks up Bradley Manning, and any citizen who dares declaim the lack of rule of law in Obummers' SIONIST SOCIALIST PARADISE will find a way to express it's dissatisfaction with just about every non-incarcerated person on the planet.

not that there's anything wrong wit dat! Just sayin!

Jack Sheet's picture

@ Joyful

Logged in especially to give you a +1 as I now ignore these posts, the only annoying feature being  that they appear directly under my mouse pointer when arriving at ZH. You have to ask what motivation a merchant banker would have to publish "institutional quality analysis" (his quote) for free on ZH.

BorisTheBlade's picture

Oh, Bad Vlad and his thugs lost their money for jailing peace and freedom loving punk band. Too bad for him, but I'm for freedom, peace and punk and my money is safe in a bank. Oh wait.

Dugald's picture

 Marc has clearly found the resources to hire a spellchecker/editor,

And this explains Slided.....?

OneTinSoldier66's picture

I liked this one...


"Germany will get the balling rolling  with its Feb retail sales report tomorrow."

Ghordius's picture

come on, give the man a bit of breathing space - you know how little he understands yet the peculiarities of ZH's comment world - and the article is quite good, imho - I found the sentence you outline quite funny, actually...+1

JOYFUL's picture

breathing space huh?

Your usually acute eye for the 'peculiarities' of the North American |prison world| appears to be failing you; the "Pussies" appear to be holding up pretty good in their [post trial] period of incarceration...Mr. Manning - not so much...

strange how 1000 days in solitary confinement without trial can be unworthy of concern to our learned "Professor Marc" - yet the antics of three mindless waifs who burst into a church to serve anti-religious invective on the congregation, and then are used as pawns in a State Department sponsored and managed smear campaign is a 'gamechanger'...

perhaps the difference in attitude reflects the unbearable lightness of being Marc to Market...just another complicit dupe a country where the work of israeli spy Jonanthan Pollards results in the death or capture of over one thousand Merikan intelligence assets, yet the decision of one brave youngster to blow the whistle on the war crimes of Merika's sionist-hijacked military is passed off as 'treason' to the "Homeland" ...

maybe selling out Merika for moolah is just the 'work of the markets' for Mr Marc.

disabledvet's picture

You're the expert. I'll leave it at that.