SCOREBOARD: Cyprus composure

European stocks gained some ground, showing little sign of worry over Cyprus, while the Fed kept its policy steady.

The snap back was on last night with stocks in Europe up 1.4 per cent on the CaC and 0.6 per cent on the Dax – although the FTSE100 was down 0.1 per cent. Markets are obviously a little more relaxed on Cyprus, notwithstanding the fact that the Troika (European Union, European Commission and International Monetary Fund) don’t appear to be major fans of Cypriot back-up plans to date. Very relaxed actually and so far German and French stocks are only off about 0.7-1 per cent since the crisis began. Whoa!

As to that crisis – well, having rejected the deposit tax, the Cypriot government has thrown up another plan. They've suggested using pension accounts as a source of funds – lucky pensioners would then get government bonds in return. The aim would be to raise almost €5 billion of the €6 billion the Troika needs to offer a bailout, without tapping into the deposits of poor innocent Russian arms dealers. The Europeans aren’t a fan though as this would add to the government’s debt load.

As for Russia, there's still no official word – neither da nor nyet. Talks appear to be ongoing. There are some options being thrown around though – the Cypriots could put all the bad assets of their banks into a public bad bank, and all the good stuff into a merged (between the two largest) super Cypriot bank which the Russians could then take an equity stake. That and some gas maybe. Throw in some loan extensions and an infrastructure grant. Bam, problem solved! Wouldn’t have thought between the EU, IMF and Russia that it would be hard to raise €6 billion. It’s a crazy world though. I mean, what’s that, half a day’s takings for some of the world’s biggest arms/drug distribution networks? It’s time to give back, guys.

Talking of crazy, the Fed meeting this morning didn’t yield any changes to policy this time around and nor was its statement all that informative. Don’t forget that we have to read Fed statements through the prism of Obama’s deficits. So the Fed is always going to be a couple of years behind reality, because Bernanke really needs to justify ongoing QE and so they belatedly acknowledge ‘moderate’ economic growth after noting growth had paused at the last meeting. That’s an upgrade! Gee, thanks Ben.

Don’t go thinking that decent growth will lead to any changes to QE though, because the Fed also signalled that this growth wouldn’t add to the case to rein in QE. How? Well, by tying future moderate growth outcomes to “appropriate policy accommodation”. In other words, the Fed will justify continued QE in the face of strong data outcomes by arguing that it all relies on QE. QE is the keystone upon which the future prosperity of America rests – or some such tripe.

Added to that, this committee only notes “downside risks to the economic outlook”. There is no discussion of upside risks – which of course is ludicrous, as this whole recovery has been characterised by upside surprises. Obama’s deficits.

Otherwise the FOMC notes that household spending and business investment have advanced and that the housing sector has strengthened. They also suggest that inflation outcomes have been lower than their objective. In terms of tier growth projections, 2013 GDP growth is expected to be between 2.3-2.8 per cent (upside was 3 per cent last time) while the unemployment rate is expected be between 7.3 and 7.5 per cent. Not much of a change really from last quarter. Slightly lower growth, slightly lower unemployment and inflation.

Traders on Wall Street (well, the computer algorithms that constitute traders these days) had already detected a bullish pattern prior to the Bernank’s statement. In fact, most gains were made on the open. The S&P only put on a few more points (0.1 per cent) after the FOMC to be up 0.6 per cent (1557) as I write. The Nasdaq is then 0.8 per cent higher (3254) and the Dow 67 points higher (14523). That means that in this crisis to date, the S&P has lost about 0.4 per cent.

Naturally enough with stocks pushing higher, the safety bid unwound and Treasuries sold off. The yield on the 10-year is 5 bps higher to 1.953, the 5-year yield is 3 bps higher (0.8 per cent) and the 2-year sits at 0.25 per cent. Aussie futures sold off about 6 and a half to 7 ticks, with the 3s at 96.97 and the 10s at 96.41. The only other price action to note is that crude is 1.1 per cent higher ($93.2), copper is 1 per cent higher and gold is down $6 to $1605.

In forex, the euro is up about 60 pips to 1.2935, the Australian dollar is unchanged at 1.0375 and there wasn’t really much to note on the British pound either (1.5105). Otherwise the yen is up over 96 from 95.

Bits and pieces otherwise: in the UK jobs surged a further 131,000 in the three months to January after a spike of 154,000 over the previous period. That said, the unemployment rate remained steady at 7.8 per cent.

Still in the UK, the Bank of England minutes revealed that the vote to not print was 6:3 – and that’s with strong jobs growth and above target inflation.

To the day ahead, the SPI suggests our market will rise 0.4 per cent. Otherwise we see New Zealand GDP, Japanese trade and HSBC’s flash China PMI. We also see the European PMIs tonight, but the key focus data-wise will be US jobless claims, existing home sales and the Philly Fed index.

Have a great day…

Adam Carr is a leading market economist.

Follow @AdamCarrEcon on Twitter.

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