Bank Levy Kills Euro Optimism

I spoke on Thursday about how the EU summit represented a ‘tinderbox’ for the Eurozone, given the level of potentially explosive matters that were due to be discussed. We could never have predicted what happened in the early hours of Saturday morning as Cyprus was, too all intents and purposes, ambushed by the bigger kids in the playground.

A bailout of roughly EUR10bn for Cyprus was agreed as long as around EUR5.8bn came from any and all Cypriot bank deposits. Account holders will lose anywhere between 6.75% and 9.9% off their account deposits before the banks re-open tomorrow morning following a convenient bank holiday today.

Those who read these updates, subscribe to our webinars or just generally know me will know that we have been looking for a re-emergence of the Eurozone crisis at some point in H1 of this year. The most likely reasons were peripheral nations once again seeing anti-austerity protests and political pressure or maybe a core country struggling under the strength of the single currency. This news from Cyprus is this year’s Eurozone starting pistol.

European weakness may not last in the short-term however, especially if the deal is agreed by the Cypriot parliament today. Peripheral yields are higher and the safe-haven German bund has hit is highest level of the year with the 2yr yield back into negative territory for the first time since January.

Good thing the euro crisis is over though eh?

Initial FX reaction has been contained to EUR selling with very little selling of other ‘risk-off’ assets such as AUD, NZD or ZAR. Significant equity and bond market moves lower will increase this likelihood through the week.

We’ve had a bounce back in GBP in the lead-up to this week’s Budget with some help coming from sentiment i.e. sterling being oversold in the short-term and some from European issues highlighting its safe haven properties. The key will now be can it last?

Fundamentals will have to be a lot stronger on this week’s data calendar than they have been so far this year. Inflation and retail sales are due on Tuesday and Thursday respectively with the Budget obviously this Wednesday. Higher inflation may see further QE being priced out of sterling markets but combined with a change to the Bank of England remit on Wednesday and a poor retail number on Thursday and sterling will be back on its heels.

In the meantime, today and tomorrow are all about Cyprus. EU group head Dijsselbloem declined to rule out a similar levy on bank deposits in other EU nations and this sets up the fears of bank runs. Political stances will harden between voters in the North and South of the EU and overall trust in politicians will likely take another leg lower. This was a terrible idea by all involved and we must be prepared to reap the whirlwind.