Index ETFs Not Sure About Cyprus Deal

Index ETFs didn’t quite buy the Cyprus deal passed last night, despite the short relief rally seen earlier this morning in US markets. The SPDR S&P 500 ETF (SPY) lost .42%, the SPDR Dow Jones Industrial Average ETF (DIA) lost .48%, the NASDAQ ETF (QQQ) lost .36%, and the iShares Russell 2000 Index ETF (IWM) finished even with a .06% increase.

A deal between the Troika (European Central Bank, European Commission, and International Monetary Fund) and Cyprus was hashed out in the 11th hour last night, just before Cyprus faced near and certain collapse. European markets immediately rose 1% as apart of a relief rally, and then quickly faded into the red when Eurogroup President Jeroen Dijsselbloem suggested that the bailout and restructuring model used in Cyprus should be a model for future restructuring efforts in other countries within the EU.

The deal for Cyprus was not a good deal for Cyprus, as any depositor with over 100,000 Euros faces a 10% “tax,” and the country’s banks are now forced to restructure. Bond holders and shareholders of the banks will likely be wiped out completely, and the total haircut on Cypriot debt is expected to be around 4.2 billion Euros. The Cypriot Parliament has approved the deal and has continued to limit capital flow on the island in the expectation of large bank runs when the banks do re-open in a few days.

Investors here at home seemed skeptical of the deal however, as today’s morning relief rally quickly ended and then sunk back into the red. Although Cyprus and the Troika did come up with a deal (just in time), investors likely reacted to the fact that if the Troika can force Cyprus into this kind of deal, other countries such as Spain, Italy, and Greece could be forced into it as well. The fact that Eurogroup President Jeroen Dijsselbloem indicated that the Cyprus deal was a good model for future bank restructuring, only worsened fears, as it appears that at least one person in the EU does not see the Cyprus model as a “one off” solution, but rather as a potential “fix” to all broken EU countries. Furthermore, and perhaps most importantly, the Cyprus/Troika deal does not fix the underlying issue of a Euro zone in recession, unable to grow its way out, at least as of yet. At the end of the day, a lot of financial pain and a lot of financial growth is needed before this situation will resolve itself. Who gets hurt along the way is up to EU officials.

At least things back at home are picking up, as the Chicago Fed and Dallas Fed today reported greater manufacturing and business activities in their respective areas.

Bottom Line: The Cyprus versus Troika battle has ended for now, with significant losses to Cypriot assets. The “deal” does not fix the underlying problem with Cyprus or the Eurozone however, which center on too much debt and too little growth; both of which are constant themes in this ongoing battle. The fact that the Eurozone remains in trouble is likely why Index ETFs and US markets’ relief rally was short lived.

Disclaimer: The content included herein is for educational and informational purposes only, and readers agree to Wall Street Sector Selector’s Disclaimer, Terms of Use, and Privacy Policy before accessing or using this or any other publication by Wall Street Sector Selector or Ridgeline Media Group, LLC.