Cyprus Conundrum Continues

It is Wednesday March 20th and the markets are now seemingly focused on the FOMC and what they will say come 2 PM. Tuesday we reported that shortly before the market close at 4 PM EST, a report was issued that claimed that the ECB will insure liquidity to Cyprus and ironically the Dow closed 4 points higher. This report was issued by Fox News and has not been substantiated by any other news bureau. In fact when I look around, no one is even bringing this up. It would appear to me that some entity (Smart Money aka Institutionals) didn’t want the Dow to close lower after 2 consecutive days of losses.

Whereas the Fed meeting is taking center stage right now, the Cyprus situation still isn’t resolved and they may be forced to leave the EU unless another nation steps in and comes to their rescue. Rumor has it that Russia may do so and in fact Cypriot Finance Minister Sarris is rumored to be in Russia right now to solidify a deal. Time will tell if this is so but there is no doubt that Russia will want something in return. Speculation is that Russia may ask for:

- A naval base in Cyprus
- Ownership or part ownership in the Cypriot banks
- Access to Cypriot natural gas deposits

The exact mechanisms of the deal aren’t known right now so much or all of this could be speculation. The question is given that Cyprus shot down the levy deal, what will/can they do? Angela Merkel of Germany has already stated that the Euro Zone won’t give in. And let’s be frank, by Euro Zone she means Germany as it has the most powerful economy and if Germany says no, it’s no. They could leave the Euro Zone but then what would they use for currency? The drachma? I don’t think so. Lastly find another nation to help them foot the bill. In this instance that would be Russia as Russia has more to lose if Cyprus defaults. Many of the depositors in Cypriot banks are Russian nationals and again, if they have to pay a levy they’re going to want something in return. If there’s any truth to this I’m certain we’ll soon find out.

In the meantime Cypriot banks are still on “holiday” and their stock market is still closed. Rumor has it that they won’t reopen on Thursday as originally planned but still require more time to firm up a deal. This is taking on a life of its own with a minute-by-minute, blow-by-blow change.

It’s after 2 PM and the FOMC made their announcement. As expected the Fed hasn’t raised interest rates and sees the need to continue with their easing program. They stated again that they will not raise rates until the Unemployment Rate in the United States falls to at least 6.5% and they don’t see that happening until 2015 at the earliest. They’ve also restated the need to continue asset purchases to the tune of 85 Billion USD per month. This was great news for the markets as the Dow closed 56 points higher.

It’s 5 AM EST on Thursday, March 21st and an announcement was just made that the Cypriot banks are on “holiday” until Monday, the 25th. The ECB has also stated that they will stop emergency funding to Cyprus on the 25th unless a deal is struck with the European Union and IMF.

The question now is will the Cyprus situation come back to haunt the markets today? Only time will tell.

Nick Mastrandrea is the author of Market Tea Leaves. Market Tea Leaves is a free, daily newsletter that discuses and teaches market correlation. Market Tea Leaves is published daily, pre-market in the United States and can be viewed at www.markettealeaves.com Feel free to visit and subscribe.