- Cyprus remains on top of the agenda, but global stock markets recover on hope that the situation is contained. In general it seems that the global markets have resumed 'risk-on' trading.
- Today, Haruhiko Kuroda takes over as new Bank of Japan governor and the Federal Reserve starts a two-policy meeting.
The situation in Cyprus remains firmly on top of the agenda in the global financial markets. However, market reaction to the highly unorthodox (in our view also dangerous) the EU/IMF bailout of Cyprus has been surprisingly limited. After initially selling off yesterday, Asian stock markets this morning are trading higher, and in general it seems like investors for now do not fear a major negative fallout from the Cyprus bailout.
The fear was (and still is) that the controversial proposal for a deposit tax on all bank deposits in Cyprus would trigger a bank run not only in Cyprus but also in other troubled eurozone countries. That has luckily not happened; it seems that the general perception among depositors in other countries and investors is that the likelihood of a similar deposit tax in other countries is very small, and that Cyprus is a ‘special case’ .
This is most likely the reason why we see a resumption of ‘risk-on’ trade this morning. Asian stocks are generally higher, the dollar and the yen are weakening, the euro is rebounding and commodity prices are also higher.
The relatively fast recovery in the global markets from the ‘Cyprus Shock’ should also be seen in the light of the expectation that both the Bank of Japan and the Federal Reserve would undertake measures to offset any negative fallout from the European situation. In that regard, it should be noted that the Fed starts a two-day policy meeting today. Bank of Japan Governor Shirakawa steps down today, and new governor Kuroda is expected to aggressively ease monetary policy to achieve the BoJ’s new 2% inflation target.
So far, markets have recovered nicely, but the situation in Cyprus remains highly uncertain. The parliament has still not voted on the bailout deal – the vote was postponed both on Sunday and yesterday. As a consequence Cyprus’s banks remain closed, and it is obvious that that is not a sustainable situation. There are some news reports that the parliament might not pass the controversial bailout, which obviously heightens the risk of a disorderly sovereign default of Cyprus. So even though the markets’ very calm reaction to the situation is reason for optimism, it is still far too early to say that the crisis has been resolved. There is certainly still a risk of negative spill-over to the global markets.
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