Macro Morning: Cyprus unearths gold

Emotions are great in markets. One day something matters, the next it doesn’t then it does again. Such has been the case this week with Cyprus. Asia was really worried Monday but the Northern hemisphere less so and then overnight with the Cypriot Parliament voting down the proposed “rescue” package markets have decided that Cyprus really might be Europe’s Amazonian butterfly. DE has written another good piece this morning which I urge you to have a look at but the picture below beside sums up the real implications of the Cypriot debacle – who is next?

Something that I think is worth noting because it means that a fix might be harder this time than it was in the past is the absence from Jean-Claude Junker from the negotiaitions. The wily old Eurocrat and Luxembourg PM is for the first time in years absent from the negotiating process replaced by a 12 year old Dutch Politician (okay he’s not really 12 but you know what I mean) who is an up and comer but as yet lacks the gravitas to command the room.

Jeroen Dijsselbloem is the Dutch Minister in question and Fox reports that:

Insiders who attended the talks said German Finance Minister Wolfgang Schaeuble and Asmussen, a fellow German, had called the shots while the 46-year-old chairman, a minister for just four months, was too inexperienced to carry much weight.

“There is a realization, a frustration, that countries outside the troika (European Commission, European Central Bank and International Monetary Fund) and Germany are becoming bystanders in these crucial Eurogroups, and Dijsselbloem is just going along with that, cementing that reality,” said one diplomat from a small euro zone country.

Indeed even Junker surfaced to say that he was disapponted with the way things had been handled telling Der Standard that:

“It was the first time I wasn’t in the Eurogroup. I would have wished for a more gentle approach to small savers,”

Without Juncker to bash the Germans into shape and with an election this year in Germany the cold Teutonic hand seems to be in the ascendancy which for markets means a back down or back flip or compromise might be harder to find.

If this is the case then the trends in markets that we have been writing about will be strengthened over the weeks ahead, specifically, gold higher and euro lower.

A little while ago gold broke lower and it looked like the meltdown had truly begun. But it managed to find some solid support at $1550 and last night traded up to $1615. Gold to me is just another market to be traded. I am neither a bull or a bear just a trader and it became clear a little while ago that it was time for a bounce. Last night’s move almost satisfies that but gold is actually starting to look more not less bullish as it rises.

The charts suggest that is has more in it then just that with the high overnight of around $1615 almost but not quite there. Adding to the bullishness is a report on the seasonality of gold I picked up from the gurus at The Stock Traders Almanac – they said:

gold has enjoyed a period of seasonal strength since 2001 that begins toward the end of March and lasts until late May (yellow shaded box). Last year this trade did not work. However, it has worked in nine of the last twelve for a theoretical cumulative single contract gain of $43,630

Seasonal patterns aren’t guaranteed it is worth keeping in mind. Also worth keeping in mind is the set up of the gold chart.

Below you can see that gold has taken out the fast and slow moving averages and is now back in the middle of the down trend. If the $1619/22 region can be breached then gold is headed toward Fibo resistance at $1639 and if that gives way $1661.

xauusd daily, gold

Turning to the euro, I have had a target around 1.2650 for some time now but as noted yesterday morning while it is above the 200 day moving average then the outlook is not dire. Last night saw the euro tested but it is closing above the 200 day moving average. But the downtrend remains firmly entrenched as you can see in the chart below.

eur, eurusd, euro, euro (eur) price quote

There is a very high probability that euro will trade down to the 1.382 Fibo extension of the recent move before the multi day consolidation.

Elsewhere overnight stocks were lower which is a bad sign for the Australian market which broke an important trend support on the close below 5000 yesterday. It looks weak and has a substantial pullback coming particulalry because broker downgrades hit BHP and Rio in overnight trade offshore. In Europe the ZEW business survey in Germany was stronger than the punditry expected but with Cyprus dominating no one cared.  Spain was hammered 2.20% lower, Italian stocks dropped 1.59% and in France where the Finance Minister has some issues to deal with stocks dropped 1.29%. The DAX was more subdued falling 0.78% and the FTSE was positively positive compared to the rest of Europe falling only 0.26%.

In the US the data was pretty good with Housing Starts and Building Permits both stronger than expected but Cyprus weighed on sentiment and even though the S&P is only down 3 points just near the close for a lose of 0.2% it was off as much as 13 or 14 points earlier. The ECB announcement that it would provide liquidity to Cyprus buoyed things a little and has actually managed to push the Dow just into the black and it is up 6 points or 0.03% just near the close. The Nasdaq is down 0.27%.

On Commodity markets Nymex crude fell 1.65% back to $92.19 Bbl. Corn and wheat rose more than 1% but soybeans were 0.3% lower. Silver was down 0.11% to $28.91 oz while gold rose to $1615 at one stage.


Kiwi current account and then the Westpac Leading Index in Australia. Eurozone Current Account tonight might be interesting and the German 10 year bond auction is bound to get plenty of bids and then the Fed decision is out tomorrow morning.

Twitter: Greg McKenna

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      • Politicians acting on the wishes of their constituents

        They’re acting in the interests of savers which will be hard for many Australians to grasp. We’re so used to policy being developed for the benefit of debotrs here.

        • Only if they can save their banks. Technically their banks are insolvent or close to it. The government can’t afford to bail out the banks because then the government would be bankrupt, there are no bondholders to speak of to sacrifice, and shareholder equity is damn all, so they can’t be sacrificed.

          It’s a terrible plan but probably the only one unless the ECB will recapitalise banks that have been money laundering and providing tax havens.

          This is a tiny tiny economy that can’t save itself, with banks that hold deposits that are a high multiple of GDP, much of it from ex KGB Russian oligarchs. I wouldn’t like to be a saver with my life savings in a Cypriot bank.

          • For the love of Pete, can we, for once in the damned crisis give CapitAlism a try!? Failure is a very important part of CapitAlism, after all.

            What I am sick and tired of is this damned CapitOlism we’ve been doing (and you seemingly are advocating)…

            Like CapitAlism? Then we need FAILURE to be an option!

        • bolstroodMEMBER

          They are acting to save their lives.

          If they had passed this they would be lynched by there electors.

          Doesn’t mean that electors understand the situation.

          Emotions rule.

      • Krugman was right – they may as well be waiving a neon sign that says “it’s a good time for a bank run”

          • It’s not an option that the government will wish for, but it’s a likely outcome. They will have to limit withdrawals, which means they won’t attract deposits.

            Whatever way we look at this the options are crappy. They can only choose the least worse crappy plan.

          • GunnamattaMEMBER

            Dont know where you are coming from Gents,

            The moment Cyprus opens its banking system (which is currently looking insolvency in the eye) there will be a massive exit of deposits in the context of as much of half of the funds in the system being from somewhere other than Cyprus. Thats regardless of any votes.

            The message the handling of this crisis has sent is ‘get your dough close to home’

          • I agree gunna. The banks must see a run if they don’t place a limit on withdrawals.
            The banks took a big haircut on Greek bonds and are overweight with underperforming loans to Greeks (cultural ties)

            It will be a mess.

          • “They can only choose the least worse crappy plan.”

            Definitely. I lol’d at The Kouk’s representation of the choice “Drink a glass of vomit or eat a piece of maggot infested rotting meat”.

            But while they are choosing between the least of the crappy plans, they should also be considering the longer term implications. Raiding deposits and receiving the bailout might be the least painful route in short term, but is it the right answer for the long term? More debt unlikely to sole debt problem + deposit raid & bailout is no guarantee they don’t have a bank run and collapse anyway…

          • @Gunnamatta, seems likely. In which case (banking system collapse either way) the politicians are better of voting in the best interest of their citizens to keep them onside…

          • GunnamattaMEMBER

            The Kouk got that pretty much right. There isnt a palatable choice.

            But the crafting of that choice, and the presentation of it has primed the doubts about

            …..the integrity of the bailout process,
            …confidence of ultimately every last depositor in a bank in Europe
            ….confidence in any possibility that a Germany with w whip hand at the ECB will be remotely cognizant of social interests in PIIGS nations (but also further afield)
            …..raised the spectre of capital controls in the context of the developed world (EU in particular) being massively in debt and needing to encourage inward flows.
            …..raised the spectre of capital controls in the context of basically every last central bank in the world (except the RBA) knowing that there is a currency war taking place.

            Off the top of my head I cant think of an issue they have completely buggered

  1. Choices (1) Lose ‘10%’ of your deposits; get shares for the ‘loss’ in return ( they might even go up in time!) and keep 90% of your Euros (2) Go broke and lose 50%, who knows how much, of your deposits in a broke bank(s) or (3) Leave the Euro and see your savings ravaged by inflation with a 50% devaluation…. decisions, decisions….One’s I hope our central bankers are wise enough to avoid having to make. But with foreign cash ( like, Russian cash to Cyprus) having to gush in to support our property market? Have they? Not in my opinion! Borrow all of their money that you can, and if push-comes-to-shove, let them try to get it back!

    • GunnamattaMEMBER

      Exactly Janet.

      They have cash coming in to invest in mining or buy mining product (which we see declining)

      They have cash coming in borrowed by banks (focused on housing and propping up prices, backed by mortgages reflecting existing property values) supporting a diminising sector of those prepared to play pass the property speculation.

      They have cash borrowed by banks supporting Australias current account deficit addiction (largely crap)

      They have cash

      • Fear of loss by even individual depositors is a good way to ensure voters push politicians to keep banks well capitalised, solvent and liquid. It also promotes a feeling that governments ought not become overextended otherwise they can’t honour their depositor guarantee in a banking crisis.

        But shouldn’t borrowers who benefit most from the credit intermediary role of banks also share in the costs of bank bailouts?

  2. Does anyone have an opinion on what will happen to the banks in Cyprus now? I am thinking as if I was a depositor – would I even risk leaving the money in there?

    A run on the bank?

    • Without the loan the banks will collapse, just as in Iceland. The cypriot government wanted to please its number 1 customer (russian oligarchs/mafia) by giving everybody a haircut so everybody complained. It would be best to let them go under, cover deposits up to 100,000Eur and let the rest take a hit. The cypriots will not do it because they truly believe they have an alternative (and DE also appears to think there is a “solution”). No big deal, banks fail all the time it is just people with short memories who seem to be surprised (and economists it seems).

    • The depositors money is at high risk. The Cypriot government simply cannot back up that government guarantee. Effectively the government guarantee does not exist.

      The bank assets are weak, and even weaker in a fire sale with no suitors. They would eventually get cents in the dollar.

      • “The bank assets are weak, and even weaker in a fire sale with no suitors.”

        This is not my feild of expertise so feel free to correct me, but the Basel 2 requirements were intended to strengthen the banks balance sheets by increasing capital/loan ratios.

        Then the IMF and Brussels propose to confiscate up to 9.9% of deposits from Cypriot banks effectively making them less solvent. What were the Beaurocrats thinking? It doesnt make sense to me.

        • ECB and IMF are stepping in to somehow shore up the banks which hold the equivalent of x5 times of Cyprus´GDP. Like Iceland before them, they became highly leveraged in the banking industry which, in turn, was highly exposed to Greece. So the choice is haircut or collapse, there is no plan C. Of course as Cyprus relies on Russian quite-not-so-legal money flows the government thought that they could share the pain with the population in the interest of the country. Parliament had other ideas, so methinks that russian mafias are going to be looking at a 15% plus haircut. That or collapse and then picking up whatever is left. So you can blame the bureaucrats for the delivery of the message but either way the scissors had to come out.

        • There is a huge loss partly from write off of Greek sovereign debt.

          Someone has to bear the loss.

          Debts that can’t be repaid won’t be repaid.

          Cyprus can’t do it by itself as the government doesn’t have the resources and can’t print because it uses the Euro.

          The insurance/guarantee of the depositors is worthless. (This is an unintended consequence of reducing reliance on wholesale funds as Australia has done. The amount covered by the implicit guarantee increases dramatically.)

          They either massage the bail out or the banks collapse and the depositors will lose far more.

          The banks will limit withdrawals when they finally reopen. Any run will be met by a freeze or withdrawal and transfer limits.

          The large depositors are facing a very long freeze and big losses unless the bail out is revised.

          This should sink in to the heads of the population and parliament over the next week.

          If they are lucky the EU will still give them a bail out with some sweetener to the insured depositors, but the big depositors are locked in to losses.

          Russia can decide if it wants to bail out its entities hurt by the Cypriot bank crisis and resolution.

          There are also questions about whether where the deposits have been lent back to Russians the Russians can arrange some sort of setoff for Russian depositors and borrowers.

          As always, the unwinding of the mess will have many twists and turns. There are also all the treasury and trading activities that will face issues: currency and interest rate swaps, outright forwards, insurance like contracts such as Credit default swaps, repurchase agreements. What happens to those who have claims against the banks and net profits not yet received? There are potentially a lot of counterparties with exposure.

          The Kouk’s analogy of a choice between maggots or vomit for the people of Cyprus is so true.

        • Thanks Explorer and JasonMnan,

          Although it should never have got to this stage, I see that a haircut would be better than losing everything thru collapse or devaluation.

          So I choose maggots, at least i would get some protein.


    • But maybe no brains. They are far better off with a bail out than a bank collapse and its attendant problems.

      Maybe the ECB will print for the insured depositors reducing the amount required of the Cypriot government and depositors and then the Parliament will pass it.

      The depositors (insured and uninsured) just haven’t had enough time to pass through anger to fear to seeking compromise.

      • To paraphrase… “My goodness! I drank so much last night the hangover is going to be MASSIVE! You know what I need? Hair of the dog!”

        This works for a while, but at some point your liver gives out.

        But hell, it worked yesterday, so why won’t it work tomorrow!?

  3. I think MB and other commentators have completely missed the point.

    A hair should not be touched on the head of the depositor before equity holders and bond holders have been wiped out.

    If Cyprus banks are insolvent (assets < liabilities, or equity < 0), then put the bank into receivership and wipe out all bond holders and equity owners. THEN and ONLY THEN, uninsured depositors could take a hit, with large depositors who lose money getting shares in a newly re-capitalized bank.

    Why the F**K are citizens being put in a first loss position ahead of bond holders etc? Because the covenants are based on messy British law and things would get messy? Too bad…

    What MB needs to be doing is outlining how these banks should be restructured so that bad debts are wiped out; how bond holders and equity holders get CLEANED OUT; and how the bank can be fairly re-capitalized and put into national hands or sold back into the private market.

    In real capitalism, if you are insolvent, then you FAIL and you LOSE MONEY/are bankrupted. The business as usual crap is unbelievable and indefensible. It is 3d1k 'rentiernomics' at its worst…

  4. The EU Stability Fund might like to buy some of that worthless Greek debt from the Cypriot banks. The debt could be discounted to some degree; and to the extent that bank assets were still inadequate, depositors should be offered bank equity in return for discounting their cash balances.

    As we used to say during the football season “pain is my friend” – and so the pain can be shared around.