Markets are trying to close the gap after one of the largest weekend gap openings in modern memory. Residual uncertainty is likely to remain. Event risk mix couldn’t be bigger with FOMC and UK Budget also up this week.
The Cyprus bail-in proposal has generated the most intense furore in the media, blogosphere and the market place of any specific news story as I can recall since the worst days of the global financial crisis. Despite the paltry size of the situation – Cyprus and its 0.20% of the EU economy, the actual size of the bail-out/bail-in, etc. – the precedence of a bail-in proposal to actually confiscate depositor funds to pay for a portion of the bailout has the market in a real tizzy.
As a reminder that the bottom line of this Cyprus situation is not particularly new, let’s all remember that QE and extend and pretend all do the same thing. They bleed savers of a portion of their funds through inflation and negative interest rates to bailout the bad decisions of the bubble days: overzealous creditors who lent too much and the debtors who borrowed too much. Woe betide the hapless saver…
The near-term uncertainty over the Cyprus bail-out specifics remains large: the deal may be reweighted to burden larger depositors and there is still uncertainty over whether the proposal will even pass. As proof of how amazingly resilient this market is, let’s realize that we’ve really hardly seen any reaction. Markets are still well off their Friday closing levels, but at the time of writing, the German DAX was 30 points clear of last Thursday’s lows and the EUR/USD, likewise, is 50-60 pips above last Thursday’s lows. So far, in the larger scheme of things, the market has barely shrugged its shoulders.
The relatively muted response could be because some believe Cyprus is an exceptional case that is really inapplicable elsewhere.
Second, perhaps the market is unwilling to do too much until it has seen the other side of Wednesday’s FOMC meeting, as so much stock in the US dollar rally has been placed in a relatively tighter Fed. Last week’s weak retail sales and ugly Michigan confidence reading cast a shadow over that story
The bigger question is whether the idea of a less accommodative Fed, the ongoing uncertainty in Cyprus and Europe's splintering politics - particulalrly in Italy - will finally create a mood change and move away from this year's extraordinary complacency.
Looking ahead
The Cyprus situation couldn’t have happened at a more “interesting” time for the market, as we also have the FOMC meeting up on Wednesday together with Chancellor Osborne’s heavily anticipated new UK budget on the same day. This will set the tone for the market’s trust in the UK and its currency, or whether a portion of the sterling shorts have been a mere flipside of the global risk-on trade that has seen enthusiastic buying of risk and selling of the most likely funding currencies, the JPY and the GBP.
The psychological line in the sand here for confidence across markets over the next few days has to be 1.3000 in EUR/USD
Interesting days ahead, one way or another, so stay careful out there.
Economic Data Highlights
- New Zealand Q1 Westpac Consumer Confidence out at 110.8 vs. 111.1 in Q4
- New Zealand Feb. Performance of Services Index out at 55.5 vs. 52.8 in Jan.
- UK Mar. Rightmove House Prices out at +1.7% MoM
- Euro Zone Jan. Trade Balance (1000)
- US Mar. NAHB Housing Market Index (1400)
- Australia RBA’s Debelle to Speak (2215)
- Australia RBA’s Lowe to Speak (2250)