Not even the usual monthly futures panacea (which in fact manages to fool the entire centrally-planned market twice every month [10], all the time), the always rising German ZEW Economic Sentiment survey, which mysteriously did not come at an all time high, but still rose from February's 48.2 to 48.5, despite expectations of a decline to 48.1, has managed to push the EUR higher in overnight trading, as a result keeping a lid on any of the generic no-volume futures levitation we have all grown to love. The reason is not that concurrently with the German data we got abysmal Eurozone Construction Output data, which plunged -7.3% Y/Y, the most in four months, following a slump in French and Spanish activity offsetting the German "confidence-boosting economic miracle" but simply because there continues to be no clarity whatsoever on events in Cyprus, where as noted earlier, the parliament may vote as soon as 6 hours from now to veto the proposed deposit confiscation "bailout/in" plan, which could lead to the first Eurozone banking system collapse, and the first expulsion of a member Eurozone nation, setting the wheels in motion for the unthinkable.
A recap of where global markets stand as of last check:
- S&P 500 futures down 0.1% to 1545.4
- Stoxx 600 down 0.4% to 295.5
- US 10Yr yield down 2bps to 1.94%
- German 10Yr yield down 3bps to 1.38%
- MSCI Asia Pacific up 0.3% to 134.5
- Gold spot down 0.2% to $1603.2/oz
Europe and Asia:
- 14/19 sectors falls, led by miners, construction
- U.K. February Inflation Accelerates to Fastest in 9 Months
- Italian Output Unexpectedly Rose in January Amid Ongoing Slump
- ASIA Asian stocks pare earlier gains, Japan’s Nikkei 225 outperforms.
- MSCI Asia Pacific up 0.3% to 134.5
- Nikkei 225 up 2%, Hang Seng down 0.2%, Kospi up 0.5%, Shanghai Composite up 0.8%, ASX down 0.6%, Sensex down 1.4%
Deutsche's Jim Reid recaps the overnight action:
The view we had yesterday on the Cyprus situation still stands that in systemic terms this is a slow burner of an issue more than an immediate macro shock but not one to be under-estimated in importance medium-term. For now assuming the proposal gets passed (the votes are seemingly not yet there – see below) and even better watered down with small depositors bearing less or even none of the levy, Europe will likely only see small short-term collateral damage. However in spite of the protests that Cyprus is a unique case, the incident has probably ensured that if a bank or banking system in Europe is again under strain then depositors are, as a minimum, likely to be on the table as a bargaining tool and these depositors would be rational to think hard about the safety of their money and potentially seek alternatives.
However if you’re looking for a positive, the outcry over the turning back on the pledge to protect depositors, especially those with less than 100k, might perhaps persuade the EU to tread more carefully in the future even though where the levy was set may have ultimately not been their call. They did sanction the deal though and perhaps both the EU and the Cypriot Government have been surprised by the verbal backlash, even if markets were less aggressive in their reaction.
Late yesterday evening, the Eurogroup issued a statement saying that the Cyprus government will introduce “more progressivity in the one-off levy” and reaffirmed the importance of “fully guaranteeing deposits below EUR100,000”. While it’s unclear exactly what this statement means, there has been talk of reworking the levy to 3% for deposits under EUR100,000 (from 6.7%); while account holders with EUR100,000 to EUR500,000 would be levied at 10% and deposits above EUR500,000 levied at 15%. At the same time, Bloomberg quoted an unnamed EU official as saying that Cyprus could meet its target of generating EUR5.8bn in funds by imposing a 15.6% levy on deposits of more than EUR100,000 and no levy on deposits below that amount. If they do go the whole way and exempt those with less than 100k it probably won’t be great for EU/Russia relations given the geographical concentration of large depositors. Although we aren’t experts on the Cypriot economy we can’t help thinking that its GDP still relies on its financial system. Indeed, a bigger hit to the larger depositor, who are likely to reside overseas and therefore have more alternatives, may actually be counter-productive to the Cypriot economy even if it makes ethical sense. So there are dilemmas for the domestic Government.
In terms of the banks, the Cypriot finance ministry has extended the bank holiday to March 20th meaning that in practice the government has a couple more days to pass legislation approving the deposit levy. On this front, unconfirmed reports suggest that Cypriot President Anastasiades held a telephone conversation with European Economic and Monetary Affairs Commissioner Olli Rehn on Monday night to inform him that there might not be enough parliamentary support for the levy (Ekathimerini). The parliamentary vote has reportedly been rescheduled to this afternoon, while earlier news reports had suggested that the vote had been postponed indefinitely. It’s possible that a reworking of the levy might help build the necessary votes.
Recapping the market reaction yesterday, the Stoxx600 opened 1.25% weaker, before rallying to close to finish just 0.2% lower on the day with investors
probably taking some comfort from comments by European officials that the levy in Cyprus was one-off, driven by a “unique” set of circumstances.
Unsurprisingly, European banking stocks were the underperformers yesterday with the sector closing 1.76% weaker. It was a similar story in credit, with the European senior and sub financials indices finishing 10bp and 15bp wider respectively, underperforming the European iTraxx (+4.25bp), although all indices were well off the day’s wides seen earlier in the session. Risk sentiment seemed to improve further with the US market open. The S&P 500 closed only -0.55% lower on the day – with a strong performance from tech stocks including Dell and Apple helping US equities find a floor. EURUSD closed 0.9% lower yesterday but is managing to claw back some of those losses in overnight markets.
Turning briefly to Asian markets, and with the exception of Chinese stocks, most equity indices have rebounded modestly from yesterday’s losses, paced by gains on the Hang Seng (+0.27%) and KOSPI (+0.60%). The regional outperformer is the Nikkei (+2.05%) which is trading near last Friday’s closing levels.
BoJ governor Shirakawa steps down from his post today, while incoming governor Kuroda has officially resigned from his current post as Asian Development Bank president according to newswires. Asian and Australian credit markets are 3-4bp tighter, while the Australian dollar (-0.2%) is marginally weaker against the USD after the release of a relatively dovish set of RBA minutes. Despite, the better risk sentiment, 10yr UST yields are broadly unchanged at 1.95%, as is gold at $1605/oz.
Looking at the day ahead, Cyprus’s parliament is scheduled to begin its debate on the deposit levy at 6pm local time (4pm GMT). Ahead of this, we have a number of data releases today including inflation and house price data in the UK. We also have the German ZEW survey; as well as housing starts and permits in the US. So there is a fair bit going on today, not to mention Pope Francis’s inaugural mass which will be attended by a number of heads of state.