Stocks bounced off yesterday's lows on the "no" vote from Cyprus led by a miraculously visible hand smashing EURUSD (and implicitly EURJPY) higher instantaneously (BIS or banks repatriating in a hurry). That faded after S&P 500 futures touched VWAP and major volume was dumped but stocks, after an ebullient morning reaching into the green from Friday, fell back once more, only to exhibit the low-volume liftathon on ECB 'no news' to green into the close (for the Dow). Treasuries practically ignored the hyped up pump in the last hour and ended at their lows yields of the week (down 10-13bps) - 3-week lows. VIX surged on the day but drifted back a little into the ramp ending at 14.5% +1vol. FX markets reverted like stocks in the afternoon but the main theme is EUR weakness and JPY strength (carry-off) and despite the USD strength, gold pushed higher to $1612. The S&P and Nasdaq ended the day red (at VWAP) while the magic of the Dow closed it green - once again hedging dominated actual selling for now.
One of the most important indicators of stress in the financial markets of Europe during the heady days of the crisis was the EUR-USD basis swap. Simply put it is an indication of the trouble that European banks are having funding themselves. Thank to the LTRO and a wash from the ECB, it has been largely off the radar for most media types. However, we note that today the 1Y EUR-USD basis swap smashed lower (more stressed) by the most since December 2011 and is at its most stressed since November. It seems trouble, no matter how much Draghi promises, is not too far under the surface...
Trade Update: Stopped out of long EUR/GBP on increasing Cyprus tensions
We opened a long EUR/GBP recommendation based on the idea that further Sterling weakness is likely given the prospect of additional monetary easing and the increasingly weak external position. Since then BoE Governor King has signalled less desire for a weaker currency and the increased Eurozone tensions linked to the Cypriot bail-out package have pushed the EUR lower. Our views on Sterling have not changed but more EUR weakness is possible in the near term and will depend on the Eurozone news flow.
We close the recommendation for a potential loss of 2.8%.
We were waiting for the ECB response, and seconds ago we got it, when the ECB uttered the magic words, saying it would provide "liquidity within existing rules." What this means is unclear, but the algos loved it and sent the EURUSD up over 50 pips higher in milliseconds. What the algos apparently don't get is that this does not account for the additional liquidity needed that would only be released if Cyprus passed the bailout vote. The last thing the ECB wants is to appear weak, and fold letting every other broke deadbeat country to demand the same equitable treatment and diluting Germany's political might. For now however, the is a move to be faded.
While everyone awaits in stunned silence to see what Citadel, GETCO and of course the NY Fed will do with stocks in the aftermath of the shocking Cypriot decision, which nobody has any idea how to respond to because as Europe made it very clear ahead of the vote, there is no "Plan B", here is some comic interlude. The name Jerome Cahuzac should be familiar to our readers: he is the French Budget minister who had been tasked with battling tax fraud. Well, technically it is not is but was: moments ago Monsieur Cahuzac resigned, for the same reason he had been investigated several months ago. Namely, having an "undisclosed" Swiss bank account. Minister in charge of battling tax fraud... resigns for having a secret Swiss account. We'll let that sink in for a bit before we go back to that other farce in the eastern Mediterranean.
Just as we predicted yesterday, the Cyprus bailout vote has not passed parliament in a move that was merely there to force Germany's bluff.
- CYPRUS BANK LEVY BILL DEFEATED WITH 36 VOTES AGAINST
- CYPRUS BANK LEVY BILL DEFEATED WITH 19 ABSTENTIONS
- CYPRUS PARLIAMENT VOTED IN SHOW OF HANDS IN NICOSIA
- ANASTASIADES FAILS TO SECURE VOTES FOR DEPOSIT LOSS BILL
What happens now, nobody knows. Prepare for a litany of very angry headlines out of the inner sanctum of Europe's despotic chambers. Hopefully Pisani can explain it all.
With the Cypriot parliament currently going through the motions and debating the proposed deposit levy tax, it appears that the vote which is due in a few minutes, will not pass as 4 of the 6 parties have declared they are against its passage, and even the ruling DISY party is now set to abstain from the vote, barring some last minute miracle. As such the purpose of the vote, which was purposefully not delayed until tomorrow, is a theatrical slap in the face of the Eurozone, as Cyprus calls Merkel's gambit, demanding equal treatment with all the other bailed out Eurozone members, and rightfully so. What happens next is unclear: the Troika has made it well known the deposit levy is the only option to preserve the stability of the local financial system, and only after the €5.8 billion deposit tax levy confiscation passes, will the ECB step in with emergency liquidity assistance. Should the government vote down the European olive branch, all bets are off. There is no Plan B.
It now seems sure that the ongoing discussion in Cyprus' government will see a "no" vote as the WSJ is reporting a rather stunning gamble by the Cypriots (and by Cypriots we mean European leaders) to force the Russians to bear the brunt of the cost of the bailout. The non-resigned Cypriot FinMin is heading to Russia to propose a deal that includes imposing a 20% to 30% levy on Russian-held deposits in Cypriot banks, which could cost them billions of euros. In exchange, Russia will be given equity in Cyprus's future national gas company and some additional strategic benefits in the sector, while Russian investors would be given control of the board of directors at Cyprus's banks. The apparent quid pro quo in this deal does nothing to hide the fact that private property was stolen and while pointing fingers just at the Russians may play well for PR purposes, it is described as "a long shot" as the Kremlin notes, "it's practically impossible to talk without knowing details."
"Either Cyprus is going to have to find the money to fund the bailout, or it's going to have to leave the Euro - to default, devalue, and decouple," is the cold hard truth that UK MEP Daniel Hannan explains in this brief clip. Neither of these paths, he goes on to say, is an easy one, but he believes "there is no doubt the second of them is the less painful - allowing Cyprus to price itself back into the market and start exporting its way back to growth again." There are no good outcomes for a country as indebted as Cyprus is, "but if I were a Cypriot member of Parliament, I would vote now to go back to an independent currency as the least painful of the various difficult options." ... he concludes, "the really interesting question is - who's next?" Now that the precedent has been set (that governments can come after what is in your savings account) what country is safe?
For a mere 0.95% handling fee, the friendly German bankers are offering Cypriot depositors the opportunity to "take fast action and secure their deposits" with a rate between 3.0 and 4.5%. As Sigma Live reports, the German Advisory Bureau is approaching Cypriot firms, denouncing the incident and asking them to take responsible actions. While it would be a stretch perhaps to wonder if the plan all along was to strengthen German banks, it is of little doubt that depositors will be quick to move any and every bill of Euros in their bank accounts as soon as their government allows.
"An RAF flight left for Cyprus this afternoon with €1M on board as a contingency measure to provide military personnel and their families with emergency loans in the event that cash machines and debit cards stop working completely," the Ministry of Defence said in a statement.
Things are escalating rather quickly... Treasuries have soared to yesterday's low yields (below 1.90%), S&P 500 futures are cracking lower on heavy volume -10 points (with the cash S&P below yesterday's lows) - after the other indices all went green earlier. The FX market is in a mini-crisis with EURUSD dumping and JPY strengthening considerably and rapidly. In Europe, it is worse as Portuguese, Spanish , and Italian bond spreads are snapping wider to post Cyprus wides; Spanish and Italian equity markets are tanking down 3-4% on the week; and GGBs are back under EUR50 - their lowest in 3 months. Gold and Silver are rising as Copper and Oil slide. Swiss 2Y rates are negative at their lowest in over 2 months. VIX is up 33% from Thursday's lows and back above 15% - biggest 2-day jump since Nov 11.
In a brief 30-second clip during a Bloomberg TV interview, none other than Anthanasios Orphanides, the former Central Bank of Cyprus Governor, explains the terrible reality of what just happened in Europe: "What we have seen in the last few days is a very serious blunder by the European governments that are essentially blackmailing the government of Cyprus to confiscate the money that belongs rightfully to the depositors in the banking system in Cyprus." He then concludes quite clearly, "It is not clear how this can affect in a positive manner the European project going forward." The Cypriot then goes on to explain how the EU is making a mockery of the idea of a banking union...
Cyprus Now Set To Vote Against Bailout, Ruling Party To Abstain Guaranteeing Failure To Ratify "Bail-In"Submitted by Tyler Durden on 03/19/2013 11:56 -0400
It appears that Cyprus is now ready to escalate, following news now coming fast and furious, that the Parliament will go ahead and vote after all, but not in a good way as even the Cypriot ruling party, formerly the only party willing to vote Yes on the Bail-In, would abstain according to Dow Jones, which means there is no support at all in the Cypriot parliament for the deposit haircut proposal.
We can only pray that Bob Pisani explains what happens next because neither we, nor anyone else, has any idea what comes now.