It’s been a good old fashioned risk-off day in Asia, with the EUR predictably at the epicentre of the sell-off. The Cypriot stability levy has been at the heart of the concern. While depositors from other sovereigns with fiscal issue such as Portugal, Spain and Greece will be looking at the levy with great interest, we are confident they are not going to flee local banks, which is ultimately the key concern here.
There will be a vote on the measures later today and while the market has dealt risk a decent blow, one wonders what will happen if the Cypriot parliament vote ‘no’. As the President said it is either this way or bankruptcy, which would certainly not be taken well by investors. It will also be interesting to hear Russia’s response given the losses its depositors will have to wear as they make up a large portion of the €21 billion deposited by non-EU residents at the end of January. By all accounts they will be compensated with equity in the banks in question (which is almost worthless anyhow), while there has also been talk of gas-linked bonds. The other key question is how on earth the banks were ever able to build up an asset base substantially higher than the country’s economic output in the first place – that’s even before you start talking about the clean bill of health the banks received from the EU’s stress test a couple of years ago.
ECB board member Joerg Asmussen has been trying his best to reassure markets that the bank has the facilities to support any liquidity concerns and that the Cyprus stability levy is a one-off. We do know that European banks themselves are fairly liquid on the whole now given the numerous operations the ECB has undertaken, and stand ready to provide further support and liquidity through its ELA (emergency liquidity assistance) if needed, so this may cushion the blow. However, it seems logical that in the short term the EUR and peripheral bonds will remain offered.
The biggest moves today have been seen in EUR/JPY (down 2.1%), while EUR/GBP has pulled back 1.3%. EUR/USD has also reacted aggressively, printing a lower low today at 1.2889, ahead of the 200-day moving average at 1.2873. Considering as futures traders are net short 24,787 contracts, there is certainly room for the hedge fund community to accumulate further shorts given holdings are well below the record – 214,418 shorts seen last June. Of course on the other side of this, gold has benefited nicely with the yellow metal briefly pushing back above $1600. We also like the CHF given its strong and stable banking system and its current account surplus which is around 12% of GDP. The country also has gross government debt under 50% of GDP, while having $460 billion in foreign exchange reserves and is the closest currency investors can get to actually owning Deutschmarks.
Asian equities have seen decent outflows to cash, with traders also moving back into the debt markets, the Aussie ten-year a notable mover, down sixteen basis points. The Nikkei is lower by 2.3%, as USD/JPY found sellers on Friday. Today’s low of 94.07 should hold in the short term ahead of key support at 93.79 – the top of the daily Ichimoku cloud, and a level the pair has not closed below since November.
The ASX has made seventeen weekly higher lows, but it seems there is a real chance this trend could come to an end this week. The local market closed below the 21-day moving average on Friday for the first time since November 27, and it will be interesting to see at what level the buyers come back in. It was predictable that we were going to see a 1%+ move today (ASX closed down 2.1%), but it hasn’t really felt panicky in any way, and you get the sense this could be the pull-back so many have been calling for in recent weeks.
Europe will clearly get off to a poor start and it seems as though equities are going to get taken to the woodshed on the open. Whether that trend continues through the day will be of interest, and it could be time that European markets finally catch up with earnings, with price action premised solely on multiple expansions given consensus earnings expectations have been going backwards. Banks will obviously be key here, so look for some sharp moves lower on the open. The market should look more favourably on bank stocks listed in the UK, France and Germany, while some of the Spanish and Italian banks could come under stress on the open. It is worth highlighting that Angela Merkel is meeting Françoise Hollande and Manual Barroso in Berlin, while we also get press statements from the Bundesbank’s Wolfgang Schaeuble and Oliver Weidman.
Look for a decent spike in the VIX which should benefit from a pick-up in put buying, and it has to be said that while traders have been expecting a pull-back of sorts, they certainly haven’t been aggressively positioned for it.