If Cyprus is going to snowball into a sizeable issue, given the potential weekend antics, then Australian investors certainly haven’t shown too much concern, piling into the banks’ 5% yield. The rest of Asia seems to have struggled though, with the Nikkei the under-performer.
You can pick one of five positive factors – a strong Philly Fed, solid existing homes sales , jobless claims and leading indicators, or even the fact that the House of Representatives approved a plan to keep the government funded for another six months, but it seems the US market chose Cyprus as the key concern. Ultimately the market closed just off the session low, and traders will be keen to see if the index can hold the 21-day moving average at 1535, ahead of the February pivot high of 1530 in the short term.
Cyprus has once again dominated the headlines, and Monday could be a big day for risk assets with the EUR at the epicentre. The Cypriot government has drawn out plans to overhaul the banks, which will include winding up the country’s largest bank and splitting it into a ‘good’ and ‘bad’ bank. The winding-down process should save €2.3 billion, while the remaining funds would come from other sources, which includes leveraging off its gas-reserves. One gets the sense that at the end of the day the Cypriots should see the pain that will come from a disorderly bank failure, and cobble together a weekend deal. Or at least that’s the plan, because if they don’t the ECB will not be there to help them out on the liquidity front. A final weekend agreement is our base-case and therefore in theory should cause the EUR to gap higher on Monday. While we feel EUR/USD has modest short-term upside risks, there will be some nervous traders who probably won’t run a flat book into the weekend. In true European style though, the plan will be sketchy and so loose that the market will probably come to see it as a band-aid solution, thus in theory after an initial spike we feel many will look to square and reverse positions.
As we detailed earlier in the week, the chance of default and euro exit can’t be ruled out (although not our initial base-case) as the EU is standing firm and not giving in at all. If nothing is heralded from the weekend, then it will be down to the ECB to sort the mess out and perhaps then we could see them do ‘whatever it takes’. Given the political instability in Italy at present, we feel the Italians, more than most, will be watching to see if further down the road Cyprus can actually survive and thrive outside of the union. Italy has actually reasonable fundamentals, running a primary surplus of 3.6% of GDP, has low foreign debt of 25% of GDP. It would not only be the most likely country to survey outside of the union, with such a strong manufacturing base it could break away from the decade of very low growth if it could devalue the lira – again unlikely, but never say never.
As we said, the ASX 200 has found buyers after hitting an intra-day low of 4927, a fall of 0.6% on the day and a 4.6% pull-back from the March 12 high of 5163. Clearly this was enough for some and the fact that the market has rallied 1% from today’s low is positive. The banks are predicably finding the love in the market, with staples not far behind. How long can these same names keep picking up the pieces? Interestingly, while the market has rallied just over 14% from the November low, the four banks have put in 42% of the points, while BHP (who has a double digit weight on the market) has put in meagre eight points (out of the 640 rally).
The gains in Australia seem to be in isolation though, with Japan down 1.5%, China lower by 0.2% and the Hang Seng softer by 0.2%, although most of the traders are off watching the Hong Kong Sevens. European markets therefore look set to see modest downside on the open and there has been nothing of note to suggest a clear directional bias from traders.
The fact there is limited data also suggests little reason to expect a pick-up in volatility, and it will be down to government officials to throw the markets around. The key release will be the German IFO survey, while currency traders will look out for unemployment numbers in Norway and Mexico.