Will The Fed Be Able To Push Cyprus Out Of The Spotlight?

Last night Cyprus threw out the €17bn bailout deal, rejecting the proposed raid on savings in order to help recapitalise the banks and support state spending.

The only real winner in all this does appear to be gold. Which, prior to the Cyprus announcement on Friday night, was floundering below $1,600. It now sits comfortably above this (at a 3-week high) as increasing numbers choose to buy gold, realising that just how sour the whole Euro structure has become.

The rejection means the ECB will have to continue to prop up the banks for even longer as they wait for some kind of agreement to be reached.

In desperation, Cyprus’ Finance Minister flew to Russia to beg a bailout deal. Not only would this likely come with conditions – such as energy revenues – it will also be seen as the final straw for the small island’s relationship with the EU. A Russian bailout is likely to be the most volatile option for the euro and the markets.

The chances of the ECB allowing the rejection of the proposed bailout in favour of Russian help is slim and we suspect an ‘agreement’ will be reached. However, whilst it seems to be most the unlikely outcome the exit of Cyprus from the Eurozone is becoming increasingly possible.

In an almost war-time sounding tale, a plane full of cash was flown to help British forces and their families.

A key principle of the EU – the free movement of capital – is in jeopardy, as capital controls are being discussed in order to prevent flight of funds from Cyprus. Meanwhile as companies struggle to operate under various repressive restrictions, they are likely to begin to collapse.

The flight to gold may be short-lived as short-sighted investors invest in gold whilst they await a decision over Cyprus. Once it looks like a bailout has been agreed or whatever is decided, then investors may turn back to quick-win assets.

Budget time

Here in the UK, British citizens will have other issues to deal with when Chancellor of the Exchequer George Osborne reveals the 2013 budget. He will no doubt argue for the continued push down the austerity path. Unfortunately this is where his lies will begin. The coalition has abandoned all plans to reduce the deficit, arguing to ‘slow this down’ this is mainly because tax revenues haven’t been as high as were expected. However the deficit is in fact rising once again.

Nothing impressive is expected from Mr Osborne this morning, as Allister Heath writes – so far his policies ‘to date have had all the consistency of a pick-and-mix counter’

The minutes from the latest BoE meeting were released earlier this morning. As before, the vote remained the same 6-3 against, with Sir Mervyn King in the minority. The pound fell prior to the release of the minutes but has recovered since. Interestingly the minutes expressed concerns over the impact of further monetary stimulus on the pound, and how it may look for management of inflation.

Here we have seen an increasing number of individuals looking to invest in gold since the last BoE minutes and the fall in the pound, a trend we expect to continue.

FOMC announcement
Of course, on the international stage, competing for attention will be the FOMC meeting and press conference. Bernanke has reduced the amount of time between the FOMC announcement and the press conference in order to reduce speculative plays in the markets.

Gold has felt the pressure this year as analysts wonder about the commitment to QE in the long-term, leavings some to question buying gold. Stronger-than-expected data in the US was released yesterday; February housing starts in the U.S. rose to 917,000 compared to an expected 915,000. Despite this I suspect Bernanke will reaffirm the FOMC’s commitment to do whatever it takes, whilst not increasing QE.

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