SCOREBOARD: Cyprus strain

Heightened tensions over Cyprus' deal and possible agreement to split the country's banks will set the mood for markets.

Nothing seems to have been fully determined as yet for Cyprus. Talks are ongoing and we may see an announcement any time now, but as I write there are only unconfirmed reports.

These reports suggest that two main Cypriot banks are to be split: the bank of Cyprus will be merged with the good assets of another bank (Laiki), while toxic assets will stay with Laiki and then be liquidated. Another Cypriot bank is to be wound down. In addition to that, 20 per cent of deposits over €100,000 at the bank of Cyprus will be converted into shares of the bank. A 4 per cent levy is then to be imposed at other banks (over €100,000).

Why are levies back on the table? Because the Cypriot government couldn’t strike a deal with the Russians.

Now that’s where we stand as I write this, but it’s all based on press reports – I haven’t seen anything official. Whatever the case, a deal has to come quick as the European Central Bank has threatened to withdraw liquidity if a deal isn’t cut today (by tomorrow morning Oz time). In the meantime, Cypriot banks have limited cash withdrawals to €100-120 per day.

Some of this, although not all, was known during Friday’s session and as you probably know by now markets got a boost. Not in Europe, fair to say, although here too the whole crisis was taken in its stride.

The main indices were down only 0.3 per cent on the Dax, 0.1 per cent in the CaC and the FTSE100 rose 0.1 per cent. In Italy, stocks were up 0.7 per cent, while they fell 0.3 per cent in Spain. More to the point, bond yields actually fell – the Italian 10-year yield off 10 bps to 4.47 per cent and Spain’s yield off 5 bps to 4.84 per cent.

On Wall Street though stocks rose – the Dow up 90 points (14,512), the S&P 0.7 per cent (1556) and the Nasdaq 0.7 per cent (3245). We’re not seeing too many signs of concern elsewhere either – crude was up 1.4 per cent ($93.7), copper up 0.9 per cent and gold down $7.7 to $1606.

Similarly, we didn’t see to many disturbances in forex. The Australian dollar is little changed at 1.044 and the euro is up about 30 pips to 1.2948, so not much to tell.

Now this may all change. We don’t know how the Cypriot situation will end, but I suspect some kind of deal will be cut. For the sake of a few billion euros, it’s in everyone’s interests. But you never know – stupid things happen. The decision, whatever it is, will likely set the tone for the week though, because there isn’t much else apart from that – it’ll otherwise be pretty quiet in the lead-up to Easter.

For Australia there is no major data, just a few bits and pieces including TD’s monthly inflation gauge and the Reserve Bank's private sector credit numbers.

The global picture isn’t much better. The key US data for the week includes durable goods orders on Tuesday night, and then the final estimate of US GDP on Thursday night. Recall that the first estimate showed US GDP fell in the quarter, but was subsequently revised up to 0.1 per cent and now expected to be revised again up to 0.5 per cent.

Other than that we see some regional manufacturing indexes – Richmond, Dallas and Chicago indexes, then two consumer confidence reads and new home sales.

In Europe we get consumer prices, industrial confidence and German retail sales. So that’s it largely. The only other thing I’d note, because it’s a very good survey, is the German IFO result which came out on Friday. The survey showed firms were slightly less optimistic. although the business climate index was down less than a point to 106.7 – and this is still above the average of 101. The Current assessment index barely moved to 109.9 (average 103), while the expectations index fell a point to 103.6 (average 100). All up you can see it’s still not a bad result.

Have a great week…

Adam Carr is a leading market economist.

Follow @AdamCarrEcon on Twitter.

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