Well the big news over the weekend was the Cypriot bailout. In case you’re wondering what kind of an economic powerhouse Cyprus is, it has a population just over 1 million and GDP just above $20 billion – about the same size as Tasmania (which has a population of 500,000).
Anyway, as a condition of receiving a €10 billion bailout, the Cypriot government was to impose a 9.9 per cent tax, ‘haircut’, whatever, on all deposits held in their country – even on foreigners, who comprise something like half of all deposits in the country. That is, for amounts in deposit over €100,000 – for amounts below it’s a little less (6.7 per cent).
Cumulatively it was hoped this tax would raise €6 billion and was an important step in the bailout process. Without it, the European Union deemed that it would not be possible, or fair, to save Cypriot banks – which as proportion of GDP are two times the EU average. There’s a broader message the EU wants to send countries as well, especially small countries –don’t let your banks grow too big.
However, as yet the Cypriot government has not passed the necessary legislation to approve the bailout, which is a problem because all of this was due to be completed early this week.
So why does any of this matter? Because all the usual soothsayers, and fearmongers, have come out of the woodwork and are telling anyone who will listen that this could start a Europe-wide bank run – well, one in Italy and Spain. This of course is a song we’ve all heard before, and is being spruiked despite the fact that Spain and Italy don’t need bailout and have ruled out such action even if they did (that doesn’t rule out a wealth tax though). Chaos reigns.
Well, not really, because as yet there doesn’t appear to be much of a reaction – the euro is little changed. But if you can push the fear hard enough, and that’s all it takes, maybe they’ll get the run they so desperately want.
Markets more broadly were little changed over Friday’s session (stocks in Europe down 0.2 per cent to 0.7 per cent and on Wall Street down around 0.2-0.3 per cent). Not really anything to push this four-year rally further I guess and the fact that US data was mixed.
So industrial production was up a strong 0.7 per cent in February, after a flat outcome the month prior. But then again consumer confidence fell to 71 from 77 in March according to Michigan University.
Then we have US consumer prices, which suggest inflation is rising, up to 2 per cent annually from 1.6 per cent, while core inflation rose 2 per cent from 1.9 per cent. European inflation was unchanged – near the top of the target at 1.8 per cent.
Not a great start to the week then, with the SPI itself off 23 points on Friday night after a soft session and the crisis in Cyprus. I should add that iron price prices continue to weaken as well, falling 4 per cent on Friday night to $132, which isn’t really going to help things for our market this week.
Outside of that there are a few things worth noting. For Australia we get the Reserve Bank's minutes – recall the bank is of the view that the labour market was softening, which was kind of blown out of the water by the strong jobs growth we saw the other day. Even if people don’t really believe 70,000 jobs were created, they can dismiss all of the jobs created for that month and the fact is the unemployment rate hasn’t increased as forecast. More to the point, surging consumer confidence (up since the Reserve Bank has held steady after falling as the Reserve Bank cut), rising house prices and strong auction clearance rates point to rates being inappropriately calibrated.
For the rest of the world, there is a bit of US housing data (starts) on Tuesday night but the main focus will be the FOMC meeting on Thursday morning. Talk is high that the Fed may pull back on QE infinity, and that would ordinarily be a reasonable expectation. I don’t however think the Fed is being reasonable. A reasonable person would acknowledge that the US economy is recovering at a decent clip and that consequently with no risk of deflation or a double dip it is no longer appropriate to print money. This isn’t the view of the FOMC though.
There are a few bits and pieces outside of that, but nothing earth shattering, I’ll talk more about them as they come up.