SCOREBOARD: No-deal Cyprus

The irony is that the euro actually pushed higher (nearly 40 pips to 1.2893), as did stocks, following Cyprus' rejection of the European Union's proposed deposit tax. Zero yays, 36 nays and 19 abstentions – and that’s with a revised plan that would have spared deposits under €20,000.

Actually, when I say pushed higher I should really say 'retraced some losses' or something like it. Fact is, stocks are weaker, but only just in some cases – the Dow is off 0.1 per cent as I write (14,432), the S&P500 down 0.2 per cent (1548) and the Nasdaq is 0.4 per cent weaker (3223).

European markets were closed when the decision was made and so didn’t have the benefit – they underperformed, with the Dax off 0.8 per cent, CaC down 1.3 per cent and the FTSE100 off 0.3 per cent. As always in these situations stocks in Italy and Spain were hit harder – down 1.6 per cent and 2.2 per cent respectively.

No one knows what will follow now. There are options of course – austerity and the like – although I suspect most are looking for some kind of Russian bailout. The Ruskies have $40 billion invested in the island and use it as a conduit to deal arms to impoverished countries and the like. So they're very close, and it’s in their interests to help out a friend.

Not sure if this is rumour or fact but apparently Gazprom, the great state-owned Russian energy company, has offered to bailout Cyprus in return for their natural gas reserves – exploration rights etc. It’s been reported via a number of news outlets but I haven’t seen anything official. Russia has already given a $2.5 billion loan to the Cypriots and I think the government is looking for this to be extended, although loans don’t cut debt.

So there's lots of uncertainty, but you know what is missing? Panic. At least for now. Markets are off, sure – and Italian and Spanish bond yields are higher by 5-6 bps a piece to 4.65 per cent for Italy and 5.01 per cent for Spain. Moreover you are seeing the Pavlovian ‘safety’ bid into US Treasuries, which continue to rally, seeing 10-year treasury yields down another 5 bps overnight to 1.907 per cent. The 5-year is about 3 bps lower at 0.777 per cent while the 2-year is at 0.244 per cent. Aussie futures are up 3.5-4 ticks on the 3s (97.020) and the 10s (96.47). But there is no outright gut-wrenching panic. The S&P is only off about 1 per cent these last few days (admittedly early).

For price action elsewhere, crude was down 1.6 per cent to $92.2, copper fell another 1 per cent and gold rose $4.4 to $1609. The Australian dollar is then off 20 pips to 1.0365 and the yen is a bit stronger at 95.012. The euro rose after the Cypriot vote – compared to 1630 AEDT, its off about 60 pips to 1.2893.

Bits and pieces otherwise, the French budget minister has resigned over suspected tax fraud and money laundering, giving everyone yet another boost of confidence for European politicians. Then in Britain inflation accelerated again in February, rising 0.7 per cent for the month after a 0.5 per cent fall, which brings it to 2.8 per cent higher annually. The UK retail price index is 3.3 per cent higher annually, while iflation remains well above target, although that won’t stop Mr Yes – Mark Carney, the Canadian hired gun to lead the Bank of England – from printing more money.

In the US, housing starts rose 0.8 per cent in February, less than the 2.8 per cent expectation and following a 7.3 per cent fall in January. Still, starts of family homes are at a five-year high and up some 32 per cent over the last year. A good outcome. 

Looking at the day ahead, the SPI suggests our market will fall half a per cent or so. Otherwise there’s nothing really of import for Australia today, nor much else for the region.

Tonight we see German producer prices, the Bank of England's policy minutes and UK employment. In the US it’s all about the FOMC, although there's not much to know from them – Bernanke, Yellen and Dudley are all committed to QE infinity in order to monetise Obama's deficits. Otherwise, the US economy is looking pretty good, and we'll get updated projections from the Fed.

Have a great day….

Adam Carr is a leading market economist.