SCOREBOARD: Eurogroup spook

Bank run fears hit European markets after comments from the Eurogroup's head, but a last-minute deal will prevent much capital flight from Cyprus.

Stocks in Spain and Italy bore the brunt of investor concern over the Cyprus deal. Everyone is now worried about a bank run apparently – seemingly justified by comments from the Eurogroup head (Dutch finance minister Jeroen Dijsselbloem) that the Cyprus deal could serve as a template.

What?! Did some hedge fund or investment bank slip him a few bucks to say that? What was he thinking? In any case, that’s not what the European Union, International Monetary Fund or European Central Bank think. The official statement is that Cyprus is a special case and it isn’t a template – I would go with that.

Now, the deal doesn’t need to be passed via the Cyprus parliament apparently, because the legislation is already in place, so the deal is done. It amounts to €10 billion in aid which will start trickling in in May I think. What isn’t clear is how much uninsured depositors will be hit and we don’t know how long capital controls will be in place. Suffice to say you won’t see much capital flight from Cyprus over the next few days, but we’ll find out in due course.

One key thing to watch out for is the ratings agencies. Remember the pattern in all these flare-ups? You get some event (not systemic, usually) and the ratings agencies then come out and fan the flames, trying to drum up panic by downgrading Italy, Spain, their banks, their companies and everyone they’ve ever spoken to. I will be surprised if they don’t do it this time round as well, especially after those comments from the Eurogroup head – they were very interesting to say the least.

Anyway, stocks in Italy were down 2.5 per cent and they were down 2.3 per cent in Spain, with the major indices not quite as bad (Dax off 0.5 per cent, CaC off 1.1 per cent and FTSE down 0.2 per cent).

In other markets we saw some big moves as well, and bond yields in both Italy and Spain spiked – 16 bps to 4.53 per cent and 20 bps to 4.9 per cent, respectively. The euro was then off two big figures to 1.2846. As you can see markets are a bit more spooked now, largely thanks to those comments from the Eurogroup head.

If you look over at the Wall Street, stocks actually pushed high on the open – it was going to be another session where the US brushed off Cyprus and its 0.2 per cent contribution to Europe. The offer came on after Dijsselbloem made his comments though.

Still as I write, Wall Street is performing much better than European markets. Still no sense of broader contagion here, or panic – but watch those ratings agencies.

At the moment the S&P500 is off 0.3 per cent (1552, 1564 at the peak) and pushing higher into the close. The Dow is down 72 points (14,439) and the Nasdaq is 0.4 per cent lower (3233).

Industrials and basic materials are being hit hardest at the moment. Commodities were otherwise mixed with crude up 0.9 per cent ($94.55), copper off 0.5 per cent and gold also weaker (down $3 to $1603).

Elsewhere we saw US Treasuries push higher, though yields were down by only 4 bps to 1.92 per cent. The 5-year fell about the same to 0.78 per cent while the 2-year is at 0.25 per cent.

Aussie futures rose 5 ticks on the 3s (96.97) and 7.5 ticks on the 10s (96.43). Then in forex, the Australian dollar is at 1.0463, up smalls from yesterday arvo. There wasn’t much of interest elsewhere, with the British pound at 1.5179 and the yen at 94.17.

Bits and pieces otherwise, New York Fed president and monetary policy extremist William Dudley basically confirmed that the Fed isn’t considering reining in QE. He argued that a "less than ideal" fiscal stance was the primary reason the Fed should continue to print. That is, to offset the supposed fiscal contraction underway.

Ironically in ether scenario, the Fed would still have to print – cutting deficits to offset contraction, while running deficits, requires Obama to borrow money and as we know it is the Fed who is funding this deficit spending. So either way, Dudley is arguing that the Fed should print. It's comments like these that are making him look like a lunatic.

Unfortunately he isn’t alone – another pearler was offered by Fed chair Bernanke overnight. You see, Bernanke rejects criticisms that the Fed is fanning the flames of a currency war. Rather than ‘beggar thy neighbour', Bernanke seems to think that his policies 'better thy neighbour'. Well at least that’s what he was arguing last night. In other words, he is helping the world, people – doing 'God’s work' – which is funny because that’s exactly what Goldman’s chief Lloyd Blankfein said he and his firm did – quite seriously, I might add. It’s a pity that most other countries disagree.

In terms of data there wasn’t much: we saw the Dallas Fed manufacturing index rise to 7.4 from 2.2 – nothing earth shattering but another sign the US economy is accelerating. 

So looking at the day ahead, the SPI suggests our market will fall 0.9 per cent today. Event wise, we get a speech from RBA governor Stevens at 1545 AEDT. Not much apart from that.

Tonight look out for durable goods orders out of the US, home sales, consumer confidence and the Richmond Fed index.

Have a great day….