Weekly Radar: Cyprus hogs the headlines but contagion fears limited
CYPRUS BRINKMANSHIP/BERNANKE IN LONDON/BRICS SUMMIT/MARCH CONSUMER SENTIMENT IN EUROPE/JAPAN INFLATION-JOBS-PRODUCTION/US-UK Q4 GDP REVISIONS
Cyprus has hogged the headlines since Friday, with bank closures now extended to a full week as they try to sort out a very messy bailout - made worse by domestic policy missteps over taxing bank deposits. As with Italy’s elections, the saga certainly challenges any market assumption that the euro crisis had abated for good and it’s also loaded with a series of potential precedents – not least the biggest taboo of them all, a euro exit. This is where the politics, brinkmanship and smoke-filled-rooms come in. Yet as Cyprus is so small and its banks in such a peculiar setup – given the scale of Russian and other foreign depositors – the euro group, ECB and IMF appear determined not to be pressured into a bailout above the already gigantic 60 percent of GDP.
And, as with Greece last year, they will likely stand firm and leave any decision to exit up to the Cypriots themselves. You can’t rule out that they may choose to go and regional risks rise somewhat as a result. But if the islanders are genuinely worried about a 6-10% tax on deposits, they may also think long and hard about the chance those deposits would be redenominated into a heavily devalued Cypriot pound. Just ask the Argentinians what that feels like. A deposit haircut may seem a like a half-decent deal by comparison if some other mix of Russian loans, pension raids or securitised future gas revenues doesn’t stack up.
So, the small scale of Cyprus, a lack of direct systemic banking or sovereign debt linkages and the likelihood of some sort of political deal eventually emerging have all served to limit the fallout from the drama on world markets – rightly or wrongly. World equities have been knocked back a bit, but remain up 5.75% year-to-date. The VIX popped higher, but remains super-low under 13%. Italian stocks are back to where they were on Friday afternoon, while the more telling Italian and Spanish 10-yr bond yields have even nudged lower. A successful Spanish government bond auction on Thursday, where yields across all maturities fell from the previous auctions in February, showed just how limited any Cyprus contagion has been so far at least.
So, unjustifiably complacent? Perhaps – there are certainly lots of bogeymen in this story. But let’s be clear about the “shock factor”. Back on Jan 1, the year kicked off with several “known knowns” ahead that everybody already knew would be messy – the US fiscal cliff, the Italian elections and the Cyprus bailout. And they all proved exactly that – messy. But few investors anywhere could claim to have not been braced for these. To be sure, all could blow up into something worse still, but none yet amounts to an investment ‘game changer’. Radars are up, however, and funds polled by BoAMerrill reckon the euro crisis has moved back to the top of their list of tail risks for the first time since August. We shall see if they continue to hold their nerve as the first quarter closes next week. More worrying for investors in Europe has been the continued funk in business sentiment in March and the Cyprus ructions won’t have helped that much since. Patience in waiting for some broad-based European economic recovery may be more limited than the seeming tolerance of noisy Cyprus bailout.
EVENTS/REPORTS TO WATCH NEXT WEEK:
Bernanke speaks in London Mon
African Union finance ministers meet in Abidjan Mon
Italy March consumer confidence Mon
Arab Summit in Doha Tues
France March consumer confidence Tues
US March consumer confidence/Feb durables and new home sales Tues
US 2-yr Treasury auction Tues
BRICS summit in Durban Weds
EZ March biz/consumer confidence Weds
Swiss KOF leading indicator Weds
Italy Jan industrial orders/retail sales Weds
France/UK Q4 GDP revisions Weds
Italian govt bond auction Weds
US Feb pending homes sales Weds
US 5-yr Treasury auction Weds
Taiwan/Czech rate decisions Thurs
German March jobless Thurs
Italy March biz confidence Thurs
EZ Feb credit/M3 data Thurs
US Q4 GDP revision/March Chicago PMI Thurs
US 7-yr Treasury auction Thurs
Japan Feb CPI, Tokyo March CPI, Feb jobless, industrial production, household spending Fri
French Feb consumer spending/PPI Fri
Italy March CPI Fri
US Feb personal income/spending Fri