Another session in which the market continues to be "cautiously optimistic" about Europe, but is confused about Cyprus which keeps sending the wrong signals: in the aftermath of the Diesel-Boom fiasco, the announcement that the preciously announced reopening of banks was also subsequently "retracted" and pushed back to at least Thursday, did little to soothe fears that anyone in Europe has any idea what they are doing. Additional confusion comes from the fact that the Chairman of the Bank of Cyprus moments ago submitted his resignation: recall that this is the bank that is supposed to survive, unlike its unluckier Laiki competitor which was made into a sacrificial lamb. This confusion has so far prevented the arrival of the traditional post-Europe open ramp, as the EURUSD is locked in a range below its 200 DMA and it is unclear what if anything can push it higher, despite the Yen increasingly becoming the funding currency of choice.
There have been no macro economic news out of Europe, with China setting the stage and pushing the Shanghai Composite lower once more (-1.25%) after domestic media reported that Chinese banks will start to exercise greater control on the scale of loans to property developers (China Securities Journal). Further to that, the southern Chinese province of Guangdong announced that it will be the first province to implement cooling measures announced recently by the national government including a 20% capital gains tax and higher downpayments for second home buyers. The multi-billion non-reverse repo (liquidity withdrawing) confirms that inflation pressures in China are as strong as ever, and the ongoing open-ended QEasing by the US and soon Japan, will do nothing to help this, or push Chinese stocks higher.
Durable goods orders will be the main data release today in which a rebound in aircraft orders which declined 45.7% in January should be a catalyst for the headline print, although ex-aircraft and defense there may be some disappointment. Also scheduled today are Case-Shiller home prices, consumer confidence and new home sales.
SocGen on the key catalysts in the past 24 hours:
In the end, it turned out to be a fairly routine market response to the Cyprus rescue programme in a way that has characterised more than one bailout and EU summit in the recent past: knee-jerk relief followed by despair over the clumsy agreement and statement between EU policymakers. It was Eurogroup chair Diijsselbloem's comments on the Cyprus bank bail-in being a template for the broader euro region that sent markets scrambling for safety yesterday, with rumours of an Italy downgrade sending the Eurostoxx bank index down to levels last seen four months ago and on-target key technical level of 105.00. The realisation that deposit holders could be hit in a more generic fashion in the event of further bank trouble is causing fresh investor and popular unrest which could bring further disruption to the economic recovery. This will make the outlook even more unpredictable and as Moody's stated yesterday, Cyprus remains at risk of default and this is credit negative for all euro area sovereigns. The events of the last few days will put scrutiny on the 3y LTRO repayments announced every Friday by the ECB.
If correlations between EUR/G10 and periphery debt had temporarily become irrelevant, they jumped back to meaningful levels. The sharp widening in 2y btp/bund (+7.5bp) and bono/bund (+9bp) spreads finally squeezed EUR/USD below the 200d moving average at 1.2880. Without being technically oversold, momentum could carry the pair down to 1.2680 There is no eurozone data to speak of today - French consumer confidence was reported lower at 84 - so the focus will shift to ECB member Nowotny's speech at 10:00CET, who last week iterated that he saw no near-term rate cut. For the US, a small decline in consumer confidence is expected after a terrible Michigan confidence survey and durable goods orders are forecast to have bounced back from the steep 5.2% fall last month.
The full event roundup is as usual from Deutsche's Jim Reid:
One can’t help wondering whether there was a spike in the sales of top-end super king size mattresses late yesterday afternoon in Europe as Dutch Finance Minister and Eurogroup President Dijsselbloem discussed how the Cyprus model, including allowing larger depositors to take the strain, could become a model for future bank bailouts in Europe. He suggested that in the event of banking stresses, shareholders and bondholders will be asked to contribute and, if necessary, uninsured deposit holders. In his interview with the Financial Times and Reuters, Mr Dijsselbloem said he was effectively “pushing back the risks” that sovereigns or EU authorities would be left to shoulder the burden of bank bailouts. He added that the relative market calm in recent months, coupled with the lack of market panic following the decision to force depositors to pay for the bailout of two large Cypriot banks, allowed the eurozone to go after private money more aggressively when banks failed.
The market reaction prompted a clarification statement later where Dijsselbloem said that Cyprus was a “specific case with exceptional challenges” and that bailout programmes do not have models or templates. However by then the earlier message had done the damage with equities and the Euro falling sharply. Indeed the cat has been increasingly let out of the bag over the last week concerning the potential for different ways of resolving future bank/sovereign crisis and these comments yesterday added to the risk than nothing is going to be off the table when it comes to any future issues for the banking sector.
Investors/creditors might also take the view that there seems to be increasing inconsistency about future potential rescues. Is the ESM now redundant? Will policy be made up on the run and maybe modelled on that seen in Cyprus? It’s impossible to know at this stage which isn’t helpful for big depositors or investors in various bank securities. Luckily at the moment markets have been generally calm enough that this doesn’t immediately create problems. However the price action in European banks yesterday demonstrated the fragility that still exists. Banking stocks (-2.1%) were amongst the worst performers on the Stoxx600 (-0.27%) yesterday with Spanish, Italian and French banks bearing the brunt of the selloff. The hardest hit banks included Intesa Sanpaolo (-6.2%), Banco Populare (-5.9%), SocGen (-6.0%), Credit Agricole (-5.8%), Unicredit (-5.8%) and BBVA (-3.6%). It was a similar story in credit markets, with the European senior and subordinated financials indices adding 11bp and 13bp respectively, underperforming other credit indices.
Maybe the lesson from all of this is that if you are fortunate enough to have a fair degree of money you might be better off spending it! Maybe that’s the master plan here? Boosting activity by forcing people to use their money rather than deposit it! Indeed I wonder how long it’ll be before an equity strategist suggests that this is bullish as money might now leave deposit accounts and go into equities!
On a separate but related issue, shares in Spain’s Bankia finished the day down 41% yesterday after details of its recapitalisation plan were released last Friday. To recapitalise Bankia, shares will be written down to a nominal value of EUR0.01, and EUR4.8 billion worth of preferred shares and subordinated debt will be converted into ordinary shares. The Spanish bank recap fund, FROB, will inject EUR10.7 billion in funds.
Spain’s economy minister was keen to point out yesterday that a Cyprus-style bailout could not be extrapolated to any other country (Bloomberg).
Outside of the developments in Europe, Chairman Bernanke spoke at a discussion panel at the London School of Economics yesterday while the NY Fed’s Bill Dudley spoke at the Economic Club of New York. Bernanke commented that the benefits of monetary easing in the advanced economies are not via exchange rates but instead through supporting domestic demand. Bernanke also said he was “skeptical” that interest rate differentials were the “dominant force” behind capital inflows into emerging economies. Dudley’s speech had a relatively dovish tone. His main points were that labor market improvements were slowing; and inflation remained subdued, warranting a continuation of the Fed’s “very accommodative” policy.
Turning briefly to overnight markets, Asian equities are trading with a weaker tone with losses of around half to one percent seen across most markets. The Nikkei is outperforming other regional equities (-0.4%), helped by a 0.2% slide in the yen against USD, after comments from the BoJ governor at the semi-annual parliamentary testimony on monetary policy. Kuroda said that the BoJ could seek to push down yields across the curve by purchasing longer-dated JGBs with maturities of up to 5 years. He also added that next week’s BoJ meeting will debate specific policy steps to achieve inflation targets, making full use of the BoJ’s capabilities. The Shanghai Composite (-1.6%) is again leading losses after domestic media reported that Chinese banks will start to exercise greater control on the scale of loans to property developers (China Securities Journal). Further to that, the southern Chinese province of Guangdong announced that it will be the first province to implement cooling measures announced recently by the national government including a 20% capital gains tax and higher downpayments for second home buyers.
Turning to the day ahead, French consumer confidence is the main data print in Europe. In the US, durable goods orders will be the main data release today with our economists expecting a decent print for February, in part driven by a rebound in aircraft orders which declined 45.7% in January. Also scheduled today are Case-Shiller home prices, consumer confidence and new home sales.