Weekly Radar-“Slow panic” feared on Cyprus as central banks meet and US reports jobless

March 28, 2013


Given the sound and fury of the past fortnight, it’s hard not to conclude that the messiness of the eventual Cyprus bailout is another inflection point in the whole euro crisis. For most observers, including Mr Dijsselbloem it seems, it ups the ante again on several fronts – 1) possible bank contagion via nervy senior creditors and depositors fearful of bail-ins at the region’s weakest institutions; 2) an unwelcome rise in the cost of borrowing for European banks who remain far more levered than US peers and are already grinding down balance sheets to the detriment of the hobbled European economy; and 3) likely heavy economic and social pressures in Cyprus going forward that, like Greece, increase euro exit risk to some degree. Add reasonable concerns about the credibility and coherence of euro policymaking during this latest episode and a side-order of German/Dutch ‘orthodoxy’ in sharp relief and it all looks a bit rum again.

Yet the reaction of world markets has been relatively calm so far. Wall St is still stalking record highs through it all for example as signs of the ongoing US recovery mount. So what gives? Today’s price action was interesting in that it started to show investors discriminating against European assets per se – most visible in the inability of European stocks to follow Wall St higher and lunge lower in euro/dollar exchange rate. European bank stocks and bonds have been knocked back relatively sharply this week post-Dijsselbloem too. If this decoupling pattern were to continue, it will remain a story of the size of the economic hit and relative underperformance. But that would change if concerns morphed into euro exit and broader systemic fears and prepare for global markets at large to feel the heat again too. We’re not back there yet with the benefit of the doubt on OMTs and pressured policy reactions still largely conceded. But many of the underlying movements that might feed system-wide stresses – what some term a “slow panic” like deposit shifts etc – will be impossible to monitor systematically by investors for many weeks yet and so nervy times are ahead as we enter Q2 after the Easter break.

Cyprus and European banks aside, next week will be about the US employment report and three of the Big Four central banks meeting Thurs. Will the ECB respond to the banking sector and consumer sentiment threats and ease rates or monetary conditions? It has plenty of real sector and inflation evidence already that Q1 underwhelmed in euro. The BoJ meeting will be as important with new governor Haruhiko Kuroda at the helm for the first time amid intense interest in how he will pursue the bank’s new aggressive reflation mandate.

Next week’s big events and data points:

Kenya Supreme Court rules on election outcome Sat

US/China March final manufacturing PMI Mon

Australia rate decision Tues

European March final manufacturing PMI Tues

EZ/Italy Feb jobless Tues

UK Feb mortgage and credit data Tues

German March CPI Tues

Thailand rate decision Weds

US ADP jobs/March final services PMIs Weds

European March final services PMIs Thurs

Spain/France government bond auction Thurs

ECB/BOJ/BOE decisions/pressers Thurs

EZ Feb retail sales Fri

US March employment report Fri


One comment

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The Cyprus debt solution should be applied by EU over all offshore zone, before it is doing the U.S. to save them self from huge debt.

Posted by ajfilipiuk | Report as abusive