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Broadgate: Market News 19/3

19 March 2013

Stocks fell on Monday after a plan to tax bank accounts in Cyprus to help pay for the country’s bailout stoked worries that it could threaten the stability of financial institutions in the euro zone.

The move pushed the S&P 500 farther from its 2007 record closing high of 1,565.15 after the index came within striking distance of the level last week.

Financial stocks led the day’s decline, with the S&P 500 financial index .SPSY down 1 percent, following a steep slide in European bank shares. JPMorgan Chase (JPM.N) fell 1 percent to $49.51.

Cypriot ministers were trying to revise a plan to seize money from bank deposits before a parliamentary vote on Tuesday that will secure the island’s financial rescue or could lead to its default.

European officials have said the measure is a one-off for a country that accounts for just 0.2 percent of European output. The fear is that savers in larger European countries will become nervous and start withdrawing funds, although there was no immediate sign of that on Monday.

“There are worries about whether there will be any spillover from the Cyprus situation,” said Nick Sargen, chief investment officer at Fort Washington Investment Advisors in Cincinnati, which oversees more than $45 billion.

“Will authorities be able to convince markets that this proposal is only for this unique situation, for such a small country where the banking system is more of a tax shelter? If they can’t, that might cause new concerns about Europe’s banking system.”

The Dow Jones industrial average slipped 62.05 points, or 0.43 percent, to 14,452.06 at the close. The Standard & Poor’s 500 Index shed 8.60 points, or 0.55 percent, to 1,552.10. The Nasdaq Composite Index dropped 11.48 points, or 0.35 percent, to close at 3,237.59.

Earlier in the day, the Dow had lost more than 100 points to tumble to an intraday low of 14,404.21. The Dow, which broke through its 2007 record highs on March 5, is still up about 10.3 percent for the year.

The S&P 500 is up 8.8 percent for the year. The benchmark index is on track to post its best quarter in a year.

“Given what went on in the rest of the globe, it’s hung in there,” said Uri Landesman, president of Platinum Partners, an alternative investment fund in New York, in reference to the S&P 500’s performance.

“The bulls are definitely still in control of this market, and because of that, it’s possible by the end of the month, we set an all-time high on the S&P,” Landesman said.

The CBOE Volatility Index, or VIX, Wall Street’s favorite barometer of fear, shot up 18.2 percent to 13.36. Last week, the VIX hit a six-year low.

Among decliners, Schlumberger shares fell 3.9 percent to $76.34 after the world’s largest oilfield services company said fewer rigs than predicted were going back to work in its North American operations.

Shares of Dow component Boeing Co fell 1.4 percent to $85.18. Boeing is putting the 787 Dreamliner through tough tests that it had helped develop, but never used on the jet.

Shares of Charter Communications Inc surged 8.8 percent to $98.04 after the Wall Street Journal said Liberty Media Corp is close to buying a 25 percent stake in the cable operator for about $2.5 billion.

Liberty shares rose 0.3 percent to $110.66.

After the bell, shares of Electronic Arts climbed 2.6 percent to $19.20 after the video game company said its chief executive has resigned. The shares closed at $18.71.

Volume was roughly 5.8 billion shares traded on the New York Stock Exchange, the Nasdaq and the NYSE MKT, compared with the 2012 average daily closing volume of about 6.45 billion.

Decliners outpaced advancers on the NYSE by a ratio of slightly more than 3 to 2, and on the Nasdaq, by about 2 to 1.

Currencies

The euro hovered around three-month lows versus the dollar on Tuesday on news that Cyprus’s parliament was unlikely to approve a controversial bailout plan that has sparked fears about the stability of euro zone financial institutions.

The common currency dropped 0.1 percent beneath late U.S. levels to trade at $1.2948 after government spokesman Christos Stylianides told state radio that the plan needed to secure a financial rescue was unlikely to be approved, and that EU partners should offer some additional help.

However, the euro held above the three-month low of $1.2882 hit on Monday after recouping some of its losses in late U.S. trade, as euro zone ministers urged Cyprus to let smaller savers escape a proposed levy on bank deposits.

“I don’t think investors care too much about the details of the deal, they are just concerned about whether it passes or not,” said Kyosuke Suzuki, director of foreign exchange at Societe Generale.

Earlier on Tuesday, Asian investors had been relieved by the apparent lack of fallout on other euro zone countries, as an uptick in Spanish and Italian debt yields appeared to be contained.

“Looking at European and U.S. markets yesterday, the injury seems to be shallow. But it would be premature to say it will heal in just two days,” said Daisuke Uno, chief strategist at Sumitomo Mitsui Bank.

The common currency now faces an uphill battle to close the yawning gap to Friday’s close of $1.3076, although there is strong support seen at its 200-day moving average of $1.2875.

Against sterling, the euro wallowed near a five-week low of 85.34 pence hit on Monday to change hands at 85.73 on Tuesday.

“If the plan is voted down, there will surely be fresh selling in the euro,” said Tohru Sasaki, the head of Japan rates and FX research at JPMorgan Chase Bank.

Sasaki also noted that euro looks vulnerable as its bounce overnight was smaller than its rebound after the fall triggered by a Greek election last May, when investors were shocked by the ruling coalition failing to win a majority.

“On Monday after the Greek election, the euro almost fully recovered from a 1 percent loss in Asia. But that turned out to be a high for many months to come, as the euro kept falling in the next two months and a half,” he said.

STORM IN A TEACUP?

As Nicosia extends its bank holiday until Thursday to avert panic, market players pondered whether savers in larger European countries would get nervous and withdraw funds, although there was no immediate sign of that on Monday.

Analysts at Barclays say they see limited risk of contagion to other countries.

“We consider that the scope of potential contagion to other peripheral countries in terms of deposit outflows and sovereign debt is considerably more limited than if such a decision would have been taken in previous programs. Specifically, we consider the likelihood of a bank run in other periphery countries to be limited, including in Greece,” they wrote.

The radical move on deposits had limited impact on Spanish and Italian debt on Monday. Their yield rose but stayed well within their recent ranges.

Commodity currencies, which took a hit in tandem with the euro initially, have recouped most of their losses, with Australian dollar trading at $1.0381, not far from a five-week high of $1.0415 hit last week.

The currency of resource-rich Australia is in focus as a new leadership takes charge in China, its biggest export market, said Michiyoshi Kato, senior vice president of forex sales at Mizuho Corporate Bank in Tokyo.

On Tuesday, the Australian dollar bought 99.12 yen, inching up from Monday’s low of 97.69 against the Japanese currency, which declined across the board as sour risk sentiment on the back of the Cyprus shock softened somewhat.

“Whether the Aussie-yen can break through 100 depends on whether the new leaders can actually fire up the economy with no manipulation. That would get investors snapping up the Aussie,” he said.

The dollar rose 0.4 percent on the day to 95.53 yen as investors covered their short bets on the greenback.

“If the dollar-yen manages to break above the top of its 93-96 yen range then it could sail pretty easily to 98. If you look at the corporate price index on a purchasing price parity basis then 97.5 looks like a buffer,” said Kato of Mizuho Corporate Bank.

“Of course, if Cyprus blows up, risk sentiment would spike, meaning it might be difficult for it to get there.”

Source:  Reuters.com

The information set out herein has been obtained from various public sources and is by way of information only. Broadgate Financial can accept no liability of any sort in relation thereto and readers should obtain their own verification of any statement before making any decision which may have any financial or other impact.

Neither the information nor the opinions herein constitute, or are they to be construed as, an offer or a solicitation of an offer to buy or sell investments.

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