Prior Week’s Lessons Part 1: “Cyprosis”, Other Top Market Movers

First, let’s start with a quick review of what moved markets each day last week.

Cyprosis:  Deterioration of Cyprus caused by hardening of cash arteries that supply it.

Monday: Cyprus bailout deal’s implications send all regions lower

That’s it. Nothing else mattered. Indexes in all three regions, Asia, Europe, and the Americas were all lower on the latest EU scare, this time emanating out of Cyprus. The problem was that the EU made its  a €10B bailout conditional on Cyprus ending its role as an offshore tax evasion haven and demanded that it tax bank deposits or leave the EZ. The Cypriot parliament, seeking to keep that business alive, chose to tax even small deposits in order to avoid hitting the big ones too hard and killing their money laundering business.

The thing that scared markets about the deal was that it broke an unspoken but assumed rule that EU bank deposits would be safe up to at least the insured €100k limit. That risked sparking a run on the banks of other peripheral EZ economies as depositors would realize they too could be subject to a similar “one time” hit. Why keep money in Spain or Italy when you can keep it in Germany or some other more stable domicile?

Such a wide scale bank run would again put the solvency of peripheral banking systems of Spain, Italy, Greece, etc. in doubt. Indeed the mere risk of that happening could become self fulfilling.

Therefore the EU clearly had to get a bailout in place before confidence in these banking systems buckled. The stakes were high, setting off a burst of dire warnings (for example). Balancing these worries, both on Monday and the rest of the week, was the belief that once again a solution would come that at least would defer the problem long enough for a tradable move higher. While Asian indexes fell hard 1.5-2.5%, the moves lower for Europe and the US were far more restrained. Is it crisis fatigue or just long experience with this kind of thing?

Tuesday: Moving On Cyprus Speculation Again

Asia enjoys technical bounce as bargain hunter swoop in after seeing European and US markets drop much less (about 0.5% in Europe, less in the US) than Asian markets (1.5 -2.7%) on Monday. That more subdued Western reaction fed the assumption that Cyprus fear will be contained

European indexes dropped harder, Germany down 0.78%, France 1.3%, and Spain 2.2%, on expectations that the Cyprus Parliament would reject the bailout deal as unfair, and suicidal from both a political perspective (given its blatant unfairness) and possibly physical perspective too (given the reputed large presence of Russian Mafia money in Cyprus banks, depositor reaction might not be limited to violent protests).

US indexes closed slightly lower as they continued treating Europe’s latest attack of “Cyprosis” as just the usual EU BS, contagion threat, deferred by more lending of printed money to the insolvent, a tradable rally as markets focus on the short term bounce rather than the now worse ultimate day of reckoning. The new loans to those who can’t pay mean an ultimately bigger default, or a more extensive printing of Euros and risk to that currency’s purchasing power.

Wednesday: US Fed’s FOMC Grabs The Attention, But FedEx The Big Headline

All regions’ indexes closed mostly higher on continued bounce after Monday’s big drop as fears about Cyprus eased on the assumption that a solution was coming given the relatively small bailout needed and the potential contagion risk from decreased GIIPS banks depositor confidence.

With no new developments likely for at least a day or so, focus shifted to the US and the Fed’s FOMC announcement, which could have been market moving if there had been any surprises. As expected, however, the Fed announced no changes to current policy despite improving US data. Overall that was obviously a positive for stocks and other risk assets, as improving US data brings increasing likelihood that he’ll announce plans to reduce stimulus in the coming months. That could remove the one real prop to the current rally.

Arguably the most important news of the day was that a major corporate barometer for the health of the global economy, FedEx,  announced disappointing earnings, and cut its guidance. This suggests that the ongoing story of slowing global growth continues with just a few isolated exceptions like the US and Germany, though neither look robust, and of course China if you happen to actually believe it makes even a good faith attempt at honest economic data.

Thursday: Data The Main Market Mover

Asian indexes were mixed with modest moves up or down but Japan was again up strongly on optimism about new easing to be announced in early April by the new incoming BoJ Governor Kuroda. Bernanke’s continuation of full QE 3 also didn’t hurt. Once again they ignored Cyprus risks as no news was taken to be good news. A good Chinese PMI report helped lift Shanghai and shares connected to it.

European and US indexes however, closed solidly lower, well over 0.5%, pressured by poor German and EZ PMI figures, and the ECB’s deadline for a Cyprus bailout deal. The positive China PMI data, as well as news of continued full QE 3 moderated the pullback.

The ECB gave Cyprus until Monday to agree on a bailout or face losing the current flow of the ECB’s ELA emergency funds for Cyprus banks, which remain closed but are offering limited ATM service. However it’s unclear whether the ECB can do this without a 66% majority vote in its Governing Council, nor that such a majority exists.

Perhaps the ever-present temptation to take profits with markets at decade highs was also a factor in the pullback, given these two news items.

Friday: Markets Mixed With Mostly Modest Moves Up Or Down On Guarded Optimism For A Cyprus Deal

Asia closed mixed, mostly modestly lower (under 0.5%) but Japan’s Nikkei plunged 2.35% on a combination of Cyprus jitters and high prices that brought profit taking. Barring any new stimulus announcements, which are not expected until the first BoJ meeting under its new Governor Kuroda, Asia is moving on Cyprus headlines, like the rest of global markets.

European indexes closed the week mixed, mostly modestly lower on guarded optimism for a last minute Cyprus deal that doesn’t damage confidence enough to derail the ongoing rally

US markets all closed solidly higher, around 0.7% on greater optimism for a Cyprus deal that doesn’t damage the ongoing risk asset rally.

Continue to part 2 for lessons and conclusions from the prior week.