As the weekend progressed it seemed more unlikely that we would be able to report any good news from Cyprus. However, taking a leaf from the Americans, an 11th hour agreement has been reached and it looks like a plan B has been agreed upon. Though if you have more than €100,000 on deposit, plan B stinks.
The deal, in brief, is as follows: Laiki bank will be wound down and then split into a good bank and a bad bank and the good portion will be merged into Bank of Cyprus. Depositors with less than €100k will be fully protected, though those with more than that stand to lose as much as 25% through an enforced bank raid. The key here is that the IMF insisted that this condition not be passed to parliament to vote upon.
The good news is that the ECB will now extend their liquidity operations within the country, allowing it to continue 'functioning' as it has over the last week. Today is another bank holiday and citizens are still being drip fed money via cash machines, though now the daily withdrawal amount has been reduced to €120 - more than enough to live on, but nowhere near enough to start draining your account.
The bad news is that this agreement still might not solve the problem. With a week's worth of capital controls and enforced depositor losses, it would be hard to see how people would want to keep their money in Cyprus once capital controls are lifted. Though these controls are likely to be extended for some time - which we won't get started on, because for restrictions to be placed on movement of funds within the single currency, surely flies in the face of what the single currency is meant to stand for and, though legal, are pretty far from moral - people are still likely to get out of Dodge as soon as they are able and a, post deduction, run on the banks would still cripple the country.
The news in the early hours has meant that Asian markets have rallied. The single currency has pushed back above 1.30 to the Dollar and Sterling continues to enjoy a slightly more dominant position than it has of late because of the 'risk on' theme. Despite the market optimism, Moody's have warned that Cyprus is a credit negative for all Euro sovereigns and they do still remain at risk of leaving the single currency, but whilst the music is back on markets will continue to danceIn the US over the weekend the Senate managed to agree on its first federal budget in four years. The agreement authorises a budget for next year that would, theoretically, work towards reducing federal shortfalls to nearly $400bn over ten years, whilst generating close to a trillion extra tax Dollars. The vote was won by just 50 votes to 49, but is an important step towards the US developing a plan to reduce its massive debt pile. By contrast the Republican led House of Representatives has also created a 'blueprint' that would balance the budget within ten years without raising taxes, but instead cutting heavily into healthcare and food stamp budgets. The agreement this weekend simply buys America time and we don't really expect any major disagreements and political stalemate out of the US until the summer now.
From Asia, we have rumours that South Korea will be the next country to jump on the stimulus bandwagon. Apparently we could get an announcement as early as tonight from the government, who have previously said that they would roll out some sort of plan, but wanted to see what the first quarter indicators looked like before deciding what to do. If there is an announcement overnight, markets are bound to buy into yet more artificial support.
Looking to this week, markets will be working out how to trade Cyprus and though there is short term optimism on the prospect, we could see repercussions in the country cause severe swings in sentiment. Sterling at the moment is enjoying the broader risk on appetite, but warnings from Fitch that we could see a ratings downgrade and Mervyn King speaking tonight could trip up the Pound's recent run of form.
If the market can get over Cyprus fairly quickly then there is some core eurozone data out that they might want to take note of. As the market has tried, and failed, three times to break below the 200 day moving average on Euro, so we could see some more support for itt in the short term. Lots of data out from the US this week and it's a short week too, so expect equity markets to be the main driver over there and we could see more record levels being made if optimism continues.
Thank you CM Trading