Tag Archive | "Euro Zone"

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USD Confidence Falls: UK Hits Highs

US equity and currency markets turned lower overnight in the face of political bickering about whether the US government should pay its bills. All three major equity markets turned down at the open on Friday and were poised to give back Thursday’s gains by 10:00 a.m. The dollar also gave ground against a number of currencies despite weakening banking news in Europe and uneasiness in Japan.

In the US, Senators Ted Cruz and Mike Lee continued their stall tactics, defying Republican leadership, and slowed the vote on the debt ceiling-Obamacare defunding bill forwarded by the House. This, in turn, will slow appropriate revisions to be returned to the House that would keep the government open. The delay tactic increased the likelihood of a government shutdown and put the debt ceiling, which will expire on October 17th, into crisis mode.

Investors are not amused. After good employment news on Thursday, The Consumer Confidence Index missed expectations on Friday coming in at 77.5, the lowest level since April 2013. Meanwhile, consumer confidence in the UK was at its highest level since 2007 and even uneasiness in the European banking sector kept consumer confidence in the euro zone higher than in the US.

In early morning trading, the Dow was off 95.05. The S&P 50  was down 9.86 and Nasdaq was 16.33 points lower.

Discord Over European Bank Stress Tests

The euro zone intends to submit its banks to controversial stress tests as a first step in solidifying the region’s banking sector. Capital infusions enabled US banks to reboot their capital reserves but in Europe there is no backstop to ensure that banks are adequately capitalized. This has caused a general tightening of credit markets in the euro zone’s more tenuous economies.

Credit markets in Greece, Italy, Portugal and Spain are frozen. As a result there is virtually no growth in these countries and unemployment remains at record highs.

The stress tests are regarded as important to stabilize international markets and currencies. However, after the stress tests are performed, there is no plan in place to remedy shortfalls. Many banks in the region have insufficient reserves. The net effect of the stress tests will be to highlight weaknesses in the banking sector with no plan to remedy the reserve shortfalls.

The tests administered by the ECB, the European Banking Authority (EBA) and the EU will reportedly be stringent. The ECB will be focused on the euro zone’s biggest banks. The model will be used by the EBA to test the remaining banks in the euro zone through a program known as the Asset Quality Review.

Europe’s top 42 banks are 70 billion euros below new international capital norms. However, analysts suspect that the problems are much bigger ion the euro zone’s smaller banks.

Euro zone purse strings are controlled by Germany who is opposed to the construction on a region-wide re-capitalization plan. Without such a plan, the stress tests will put pressure on governments in the area to boost the banks.

The prognosis is that the absence of testing gives the banks a grace period but the day of reckoning is on the horizon.


The USD was down 0.1 percent against a basket of currencies. After gaining 0.3 percent on Thursday.

The biggest move of the day came from the UK where British sterling was up 0.4 percent at $1.6096. The UK recovery appears to be gaining momentum.

The dollar did not fare well against the euro ($1.3558) or the yen 98.280.

Yield on the 10-year Treasury continued its trend toward 2.5 percent and was at 2.62 percent early Friday.

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Germany And France Data Prompts Equities Growth

Good news from Germany and France lifted the euro zone out of a prolonged 18 month recession and broadly boosted European equity markets. Germany’s critical economy posted a 0.7 percent growth rate in the second quarter. GDP expanded due to strong spending within the country and with better exports than expected. Public consumption has been slow during the past 18 months but the new data reflected a new and stronger consumer sentiment in Europe’s largest economy.

Meanwhile, in France, the economy posted 0.5 percent growth during the second quarter. Both countries surpassed the US growth of 0.4 percent. The gain marked France’s biggest upturn since early 2011.

Olli Rehn, the Commissioner of the European Economic and Monetary Affairs, announced a euro zone gain in GDP of 0.3 percent in the second quarter. This gain comes despite obvious struggles in the region’s southern tier, particularly in Spain, Italy, Greece and Cyprus. Rehn was quick to point out that while this is a positive step, the recovery as extremely tenuous and political dissention and economic policy shifts could reverse the positive trend.

German Chancellor Angela Merkel and France’s President Francois Hollande were quick to move center stage alongside the new data. The political leaders have had opposing opinions about the relationship between austerity and growth. The common thread in the euro zone currently is that growth must always be given consideration. The effects of the region’s sharp austerity programs seem to be easing in countries other than in the southern tier.

One austerity nation in the southern tier, Portugal, who has served as a role model of sorts, saw its GDP grow 1.1 percent, the largest gain in 3 years. Even Spain, which has been the center of bitter internal and external controversy improved its GDP but still came up short with a 0.1 percent contraction.

Euro zone bad boy, Greece, is enduring its sixth consecutive year of recession. Contraction is projected at about 0.25 percent this year. Meanwhile, island nation Cyprus, still reeling from the banking scandal earlier this year, saw the economy shrink about 1.4 percent in the second quarter.  Data has not been released from Italy but preliminary projections are not optimistic.

On the downside, most analysts feel the growth will be difficult for European countries to sustain for the rest of 2014. Sustained growth is projected to begin in 2015.

Another European Union member that posted stronger than expected employment data was the UK. A sharp downturn in jobless claims in the UK pushed sterling to $1.5519, up 0.5 percent. Speculation as to whether interest rates would continue to be linked to unemployment immediately followed. There is strong support for a rate hike by the Bank of England (BoE).

Strong GDP growth was posted in Czechoslovakia who posted a 0.7 percent gain and marked the end of a prolonged recession.

Despite the positive economic data, the euro gave some ground against the dollar to $1.3252, a 0.1 percent fall. The dollar lost ground to the yen at 98.18 yen. The US 10-year note yield hedged a little to 2.7154, off Tuesday’s high of 2.72 percent.

Trading is light in US markets. Uneasiness about Federal Reserve policy is the main factor but with Congress on vacation and many investors breaking for the month, trading has been light.

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Euro, Dollar Strengthen

The dollar drew support from a boost in manufacturing and strong housing gains to spike consumer confidence. Meanwhile, the euro posted surprisingly improved manufacturing as Germany recovered nicely from recent fluctuations. While earnings from giants Caterpillar and AT&T disappointed, US equities only suffered minor losses after reaching historic intraday highs on Tuesday. Gold suffered its first setback in four days.

Equities in Europe sustained reasonable gains on Wednesday. Manufacturing across the 17-nation euro zone indicated that the region’s 17-month recession shows sign of easing.

The news was welcome relief for a market that has become increasingly fixated on unenthusiastic economic data from China and the volatile performance of Japan’s stock market. Chinese manufacturing contracted for the third consecutive month in July and plateaued to an 11-month low.

The US housing report showed existing home sales climbed to a 5-year high in June. Sales spiked despite an increase in lending rates. Conversation in Washington indicated that lending standards might ease for first-time homebuyers, a necessary commodity for a full housing recovery.

US Equities

The Dow closed off 25.50 points settling at 15,542.24 down 0.016 percent. The S&P 500 Index dropped 6.45 points, off 0.38 percent to 1.685.94. The Nasdaq Composite Index closed at 3,579.60 down 0.33 points.

Caterpillar lost 2.4 percent to $83.44 after disappointing quarterly returns and a downward projection for the rest of the year. AT&T lost 1.1 percent to $35.40 as mobile service sales failed to meet projections.

In after-hours news, Facebook reported stronger than expected revenues lifting the stock 15 percent to $26.51.

European Equities

Europe’s FTSEEuroFirst 300 Index held on for a 0.6 percent gain, closing at 1,214.63. Technology had pushed the market higher earlier in the day. Apple’s 6 percent gain to $443.86 put the stvck at its highest level since June 10, 2013.

The MSCI world equity index fell o,25 percent to 375.09. The market suffered from the weak Asian data.


US Treasury yields rose on the strength of the new data and sentiment that the Fed will begin to taper its stimulus. The yield on the benchmark 10-year note jumped 2.581 percent but a Wednesday sale of 5-year notes met with weak demand.

The dollar index gained 0.4 percent to 82.272 on strong momentum just before the close. The gains ended three days of losses.

The euro dipped from a one-month high of $1.3256 to 0.2 percent lower. The euro closed at $1.3198. Volume on the euro/dollar pair reached $4.6 billion in heavy trading.

German and French consumer sentiment polls surpassed expectations creating heavy trading of low positions. The French and German PMI was in sharp contrast to sentiment in China.

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Greece, Portugal, Spain Wavering

Greece, Portugal and Spain headline separate financial woes in the euro zone’s southern tier but there are other stress points that the Troika (EU-IMF-ECB) will need to put to rest to keep the bailouts for the three countries intact. As usual, Greece faces the biggest and most immediate challenges.

Greece is scheduled to redeem 2.2 billion euros in bonds in August. If Athens fails, the IMF would have to violate its rules to standby its commitment to the 240-billion-euro bailout scheme. IMF rules require a borrower to be financed one year ahead of schedule.

An IMF pullout would be disastrous to the euro and euro zone. Lenders are unhappy about Greece’s faltering efforts, a missed June deadline and lack of austerity. But, other aspects of the southern tier countries are also falling apart.

In Portugal, highly regarded Finance Minister Vitor Gaspar, who has been in favor with the Troika and is the recognized architect of the country’s austerity program, resigned on Monday. The country had a strategy to exit the EU/IMF bailout but those plans may be dissipating.

In Italy, political tensions are heightened. Prime Minister Enrico Letta was forced to call a government meeting after a coalition partner threatened to withdraw support for the austerity plan. Investors are anxiously following Italy as are members of the Troika.

Greece’s recent efforts to close spending nearly closed another prolonged government shutdown. The closing of the public radio station, ERT, seemed the most sensible and painless means to meet a government reduction deadline.

Greece missed a June deadline to put 12,500 workers into a “mobility scheme,” whereby they would be transferred or terminated within 12 months. Adding to the problem is that the state-run health insurer, EOPYY, has suffered an unexpected 1 billion euro shortfall. Deeper spending cuts are the only means to reduce the shortfall.

Greece has also failed to liquidate certain public assets, most notably the sale of the government-run gas company. Amidst this chaos, Prime Minister Antonius Samaras has declared that no new austerity cuts will be implemented.

Greece’s unemployment rate is now 27 percent. The country has lost 33 percent of its disposable income. Despite all this data, the euro remains solid against the dollar and the yen.

Currency Shifts  

The dollar achieved four-week highs against a basket of currencies. US ten-year bonds were steady at 2.48 and luring investors back to the market.

The dollar also continued its climb against the yen. The yen remains under pressure from the Bank of Japan’s aggressive stimulus program but is also reflecting concerns about Asian economies and emerging economies in general. China’s slowdown is affecting all economies and currencies at emerging economies are suffering as a result. The dollar settled at 99.87 yen.

The euro held above the $1.30 mark settling at $1.3062, below the 200-day average of $1.3074. Against the yen, the euro reached a three-week high of 130.485.

The Australian dollar slumped 0.7 percent to $0.9172 upon news that the currency has fallen 13 percent against the USD. The cash rate set by the RBA stayed at 2.75 percent for the second month in succession.

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Good Jobs Helps Dollar

Better than expected jobs data from the US Department of Labor sparked US equity markets and stabilized the dollar on Friday. While the non-farm payroll report was encouraging, it hardly appears robust enough to dissuade the Federal Reserve from continuing its current bond buying initiative. US equity markets welcomed the news on two fronts; first that the Fed will most likely be continuing its support and secondly that while growth may be slowing in the second quarter, the hiring indicates the possibility of a strong finish this year.

The private sector added 175,000 non-farm payroll jobs in May, a significant improvement over April’s 149,000 new jobs. There are 4.4 million Americans that have been unemployed for more than six months. This poses a problem for the Fed who believes that many of these workers may not be employable without new skills.

In the last 12 months, the ranks of the long-term unemployed have decreased by about one million workers.  Over the last year, earnings have risen by a modest 2 percent, below expectations.

The manufacturing sector lost 8,000 jobs in May. This sector is troubled by the economic woes in the euro zone. The professional and business services sector experienced surprising growth adding 26,000 temporary jobs. It is hoped many of these positions will convert to full-time employment. As expected, the leisure and hospitality industry responded to seasonal demand showing excellent job growth as did the construction industry. Retail also posted strong gains.

Despite the gains, the jobless rate jumped to 7.6 percent. The rise is attributed to 420,000 persons entering the category. This is a positive development because there are more persons looking for work. The government’s household survey indicated that 63.4 percent of the population was engaged in the labor force.

The number of Americans unemployed for 27 weeks or less edged down to 37.3 percent. The average duration of the unemployed rose to 36.9 weeks. These are important stats the Fed monitors closely.

Terry Sheehan, an economic analyst with Stone & McCarthy Research Associates, explained his take on the data: “We don’t think there is anything decisive in this report to change our outlook for the Fed decision. We think it’s still probable that they will start paring the asset purchase program at the July meeting, but we have more data due in the next couple of weeks, retail sales in particular.

“If the economic data comes in stronger in the coming weeks the FOMC could determine that it’s time to start paring back purchases.

“As to the overall report, we think it’s pretty much steady-as-she-goes for payroll growth. The uptick in the unemployment rate is not particularly concerning. It may be that the late survey period in May meant that some college graduates entered the labor force earlier than usual.”

USD Stabilizes

The dollar settled after the payroll reports was released. The trend lately has been down. On Wednesday, ECG President Mario Draghi announced the ECB would not be increasing its stimulus spending. The news sent the euro to three month highs at $1.3306.  By late afternoon on Friday, the euro was trading at $1.3222.

Against the yen, the dollar has given away much of its gains in the last few weeks. In September 2012, the dollar was 77.12 yen. Earlier in May, the dollar hit 103.73 yen. Late Friday, the dollar bounced back from Thursday’s low to 97.52 yen.

The volatility is clear. This week, the dollar will suffer its worst weekly loss since July 2009.

With the news that Canada added 95,000 new jobs in May, the Canadian loonie gained strength against the dollar to $1.0225. The Canadian jobs report shows the biggest addition of jobs in more than 11 years.

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Dollar Down, Housing Up

US equities held on to opening gains despite weak employment data and a slight reduction in 1st quarter GDP, down from 2.5 to 2.4. The dollar lost ground against a basket of currencies and the euro but remained stable against the yen. Nervous investors have been on edge since Federal Reserve Chairman Ben Bernanke hinted that the Fed was considering tapering down the current easing levels.

Across the pond, euro zone optimism lifted on positive consumer confidence from the region’s five biggest economies; Germany, France, Italy, Spain and the Netherlands. The euro reached a two-week high against the dollar at $1.2974 as analysts are reconsidering the ECB’s potential rate cut.

In overnight trading, the Nikkei had fallen 5 percent to a five- week low. Rumors emerged that Japan’s pension funds were considering investing in equities. The Bank of Japan’s $1.4 trillion quantitative easing has not accomplished the anticipated goals.  Economists are grappling with new solutions. The dollar-yen remains over the 100 threshold.

Housing Surges

S&P/Case Shiller composite index gave more credence to a housing recovery. The index of 50 metropolitan areas showed an increase in average March selling prices of 10.9 percent year-over-year. This marks the largest increase since April 2006 when housing was booming. March house prices rose by 1.1 percent over February.

Confidence in the real estate market also climbed to its highest level in 5 years. Analysts see this as giving legs to the industry’s recovery.

Some of the cities hit hardest by the recession showed strong sales data.

  • Phoenix selling prices are up 22.5 percent this year.
  • San Francisco residential real estate is up 22.2 percent.
  • Las Vegas housing prices are up 20.6 8in 2013.
  • Los Angeles housing prices are up 16.6 percent.

Case Shiller’s national index was up 3.9 percent in the first quarter compared to a 2.4 percent gain in the last quarter 2012.

Barclay’s economist, Michael Gapen, told Reuters:

“Low inventories and gradually improving housing demand have combined to push housing starts higher and support home price appreciation.

“We see these factors as remaining in place and expect residential investment to add to GDP growth in the coming quarters. We also expect rising real estate wealth to support household balance sheets and underpin consumption, helping the broader economy to offset a substantial fiscal drag in 2013.”

Unemployment Claims Rise 10,000

Initial claims for state unemployment benefits jumped by 10,000 last week. This caught analysts by surprise but might help the markets as the trend will ensure the Fed stays in the game. Seasonally adjusted unemployment sits at 354,000 as the four-week moving average climbed up 6,750 to 347,250.

The Consumer Board had encouraging news, reporting that consumer attitudes moved up to 76.2 from 69 in April. This marks the Consumer Board’s highest rating since February, 2008.

Consumer spending accounts for two-thirds of the nation’s GDP. However, second quarter consumption has slowed to 2.5 percent from the encouraging 3.2 percent during the first quarter. Consumer perception of the job market also improved.


The Commerce Department reported that GDP grew by 2.4 percent during the first quarter, revised down from 2.5 percent. GDP concerns are fueled by the inability of Congress to attend to the people’s financial business. First quarter growth was influenced by reduced government spending, down 4.9 percent in the first quarter alone. The full impact of the sequestration has yet to be felt and many analysts believe growth in the second and third quarters will be low. A pickup in the fourth quarter is expected.

Regrettably, increased fuel prices have contributed to first quarter growth. Reduced energy prices in the second quarter will hurt growth unless consumers spend their savings.

Another factor weighing on GDP is the volatile inventory levels. If the inventory component of GDP is excluded, GDP rose at 1.8 percent.

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Bernanke Mixed Message Sends Nervous Tremors

Muddled messages from the Federal Reserve and a sharp downturn in China’s manufacturing sector and in consumer confidence, sent global equity markets into a tailspin in overnight trading. Better than expected employment numbers in the US brought some stability back as the DJ average rebounded from a triple digit losses at the open. For the week ended May 11, 2013, claims for state unemployment benefits after the first week dipped by 112,000 to 2.91 million recipients, the lowest number of claimants in five years.

Japan’s Nikkei share index .N225 dipped 7.3 percent overnight following data from China’s manufacturing sector and news that the euro zone’s extended pattern of contraction looked more ominous. The Nikkei index had been up a stunning 45 percent this year.

Japan’s newest easing initiative has driven the value of the yen down and led to a very liquid economy that is sputtering for growth. Japan’s profits and growth are stagnant giving reason to question the fantastic gains in equities. It is increasingly clear that global markets are reliant upon quantitative easing that in many ways outweighs output.

Tobias Blattner, a European Economist at Daiwa Capital Markets, told Reuters; “All the global developments we see in the markets right now are purely liquidity-driven, they are no longer underpinned by fundamentals. We must learn to live with that kind of volatility.”

Yen and Euro Rise  

Analysts appeared confused by Bernanke’s statements before Congress. During his questioning, markets slipped immediately. After the Q&A following the Congressional hearing, markets recovered. However, the minutes of the Federal Reserve showed support for reducing Fed’s aggressive purchasing policy if certain factors came into place.

Bernanke told Congress that growth hit 2.5 percent during the first quarter and that employment was encouraging but still well below acceptable levels. He also explained that inflation was steady at about 1 percent, half of the red flag milestone set by the Federal Reserve. Inflation has benefited from reduced energy consumption and pricing.

The dollar-yen dipped as low as 1.01.45 before rallying to 101.68, a 1.4 percent fall from Wednesday’s levels. The euro also made headway against the dollar, trading at $1.2894, a 0.3 percent gain for  the day.

Euro zone weakness is weighing heavily on global manufacturing.

Bernanke Leaves Analysts On Edge

One of the purposes of the Fed’s purchasing program is to increase wealth. Equity markets have been big beneficiaries from this strategy. Americans are saving at the highest rates in 4 years. Recent good news from the National Association of Realtors points to gradual recovery in the housing market.

Bernanke explained the impact of the Fed’s $85 billion monthly bond purchases;  “Monetary policy is providing significant benefits. Monetary policy has also helped offset incipient deflationary pressures and kept inflation from falling even further below the (Fed’s) 2 percent longer-run objective.”

The Federal Reserve’s minutes showed that several board members advocate reducing the purchasing program as early as June. This sent tremors through the equity and bond markets. The benchmark 10-year treasury bond climbed over 2 percent for the first time since March. Japan’s 10-year bonds climbed to 1 percent.

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Euro Zone GDP Contracts Further

The 17-nation euro zone output shrank by 0.2 percent in the first quarter 2013 creating the longest recession in the bloc’s history. Projections for the future are not promising. Analysts project slight growth in late 2013 but no significant upturn until 2015. The first quarter contraction marks the sixth consecutive quarter that euro zone GDP has contracted.

France which has been teetering on the edge of a recession finally crossed the line and suffered a 0.2 percent downturn, equaling its output in the fourth quarter 2012. Unemployment in France is at record levels.

France joined the list of euro zone economies in recessions. Finland, Cyprus, Italy, The Netherlands, Portugal, Greece and Spain are solidly entrenched in recessions. Italy and Spain, the euro zone’s third and fourth largest euro zone economies, have endured seven consecutive quarters of negative growth.

The new data pushed the euro below the 1.29USD mark. The currency fell to six-week lows and shows little hope for recovery. The trend of the euro and the anemic growth in the bloc may prompt the ECB to engage in more aggressive monetary easing initiatives.

Last week, the ECB cut interest rates to historic lows. However, Mario Draghi, ECB president, has said that he is not opposed to another rate cut.

Austerity vs. Growth

To a degree, German led calls for austerity have stabilized the euro zone treaty. But, most of the nations want to shift the focus to growth. Euro zone unemployment is estimated to include more than 19 million workers.

The consensus is that the natives of the euro zone have been pushed about as far as they can go. France has been an advocate for growth and has marked the formation of a Europe-wide banking supervisor as an important step in the region’s recovery. German finance minister Wolfgang Schaeuble and Chancellor Angela Merkel have opposed this new initiative fearing that Germany would have to bear the heavy load.

On Tuesday, Schaeuble appeared to soften his position, suggesting that the new, broader banking union could be structured by June. A second aspect of this initiative would call for identification of banks that need to be closed. Schaeuble told French finance minister Pierre Moscovici that the new banking union was a “priority object.”

Germany, always the pillar of the euro zone, is facing its own manufacturing, export and GDP problems. GDP was revised from negative 0.6 percent in the fourth quarter 2012 to 0.7 percent. Germany narrowly avoided falling into recession by posting a 0.1 percent gain in the first quarter 2013. Despite its tempered growth, Germany enjoys the lowest unemployment rate in years.

Liquidity Driving Equity Markets

The euro is off 2.3 percent in May, hitting 1.2883USD in overnight trading. The dollar rests comfortably in the 102 range against the yen. The ECB is likely to consider another rate cut before the end of the year. The dollar reached 102.63 yen overnight.

Meanwhile, the Federal Reserve and the Bank of Japan continue to pour money into easing programs. The weak yen is very liable to cause more export stress in Europe.

The UK has been damaged by the weaker euro and the stronger pound. UK exports have lowered to Europe but have increased to other markets like Southeast Asia and Africa. Outgoing Bank of England head, Mervyn King hinted that the BoE may be softening its easing program shortly. King put forth the first positive outlook for the UK since the outset of the financial crisis. Britain has been successful encouraging small business growth but still fights high unemployment and a slumping housing market.

All eyes will be on Italy’s upcoming 30-year bond auction after Spain had a successful 10 billion euro sale of its 10-year bonds on Tuesday. After Fitch Ratings upgraded the nation’s sovereign debt, a positive accomplishment, Greece’s 10-year bonds surged in Wednesday’s auction. Greece is no longer viewed as a country about to leave the euro zone, a credit to the tough love imposed by Germany.

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Cyprus, ECB and BoJ Weigh On Markets

As details of the Memorandum of Understanding (MoU) between government and the “Supreme Savings‘ international lenders” were revealed on Tuesday, markets stepped back to gauge the 10 billion euro bailout. Markets also slowed in anticipation of this week’s updates from the Bank of Japan (BoJ) and the European Central Bank (ECB). Investors are concerned about whether the BoJ will scale down its proposed easing initiative. At the same time, the ECB will need to calm investor fears in the wake of the Cyprus fiasco that cost international investors billions of euros.

One of the big concerns facing the euro zone and the European Union is whether the Cyprus model is the model that could befall Spain and Italy. A general lack of confidence in the EU has led to the paring of the euro. Investors are unclear as to the direction of the BoJ and the USD rose to its highest level in two weeks against the yen.

Cyprus Turnaround Outlined

The MoU leaves little doubt about what the bailout investors, who contributed 10 billion euros to the troubled banking sector, will require of Cyprus. Meanwhile, the former finance minister resigned in anticipation of legal action for his roll as President of the country’s second largest bank, which failed last week.

As if there was not enough disgruntlement on the island nation, Cypriots are now staring at some lofty goals that are likely to impose the similar austerity sanctions other southern tier euro zone neighbors face.

The MoU says Cyprus must attain a four percent of GDP primary surplus by fiscal year 2017. This would a significant turnaround.

Reuters reports there are a number of other goals established by the MoU:

  • In 2013, Cyprus will suffer a 395 million euro budget shortfall (2.4 percent of GDP) in 2013.
  • This shortfall exceeded the 1.9 percent deficit in 2012.
  • In 2014, the deficit will expand further to 678 million euros.
  • The MoU expects the deficit to pare down to 344 million (2.1 percent GDP) by 2015.
  • In 2016, Cyprus is charged to achieve a primary surplus of 204 million euros (1.2 percent GDP) by 2016.
  • By 2017, Cyprus must achieve a 4 percent surplus by 2017.
  • Growth in Cyprus will contract by 8 percent this year.
  • Growth in Cyprus will contract 3 percent in 2014.
  • Growth will finally increase by 1 percent in 2015 and 2016.

In light of these assumptions, Cyprus has much work to do to live up to expectations. The 8 percent paring of GDP suggests a good amount of austerity will be necessary and Cypriots have thus far rejected most EU initiatives.

The MoU states that Cyprus will earn about 1.4 billion euros by selling certain state-owned assets, such as state-owned telecoms. Additionally, Cyprus expects to realize revenue from selling off rights to undersea natural gas deposits, which have been found of the island coastline.

The future of the public sector will be under pressure with new actions taken by government. The banking sector employment is already in turmoil. Now, government has announced that public sector pensions are frozen. The retirement age will be raised by 2 years. New taxes will be imposed upon alcohol, tobacco products and petrol. The VAT will be increased and corporate taxes on earnings and on interests earnings will also rise. Fees for all government services will increase by 17 percent effective immediately.

These measures are designed to ensure that debt in Cyprus is at 100 percent by 2020.

The ECB, BoJ and BoE

Investors are anxiously awaiting results from the three central banks. There are concerns that the BoJ will scale back on its proposed quantitative easing policy.

The ECB is now expected to hold steady on current interest rates. Prior to the Cyprus crisis, it was projected that the EC would raise interest rates.

In England, the BoE is expected to continue its current purchase of asset program without increasing the stimulus. British sterling gave back recent gains in anticipation of the upcoming central bank meeting. It is nervous times on the currency front.

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Cyprus Banks, Italy’s Politics Drain Markets

For a nation that contributes just 2 percent to euro zone growth, the proposed bailout is taking a far larger measure of the market than seems proportionate. In fact, the handling of the Cypriot bank bailout is weighing heavily across the globe.

There are many fears surrounding the bailout approved by the European Union, the International Monetary Fund and the European Central Bank. The biggest concerns are that the restraints imposed upon international accounts and the troublesome capital controls which have yet to be revealed.

Unconfirmed reports suggest that Cypriot banks will re-open on Thursday. In anticipation of runs on the banks, withdrawal restrictions will be imposed. It will be difficult to move money out of the country and national depositors will be limited as to how much money can be withdrawn in a single day or in a single transaction.

Foreign Investors    

The fate of foreign investors is sure to test the nerves of wary depositors in Cyprus and throughout the European Union. The fear is that the Cypriot model will serve as a remedy for other troubled banks in the region.

Cypriots are expected to pull huge sums of deposits out of the country’s banks. There is a very real sense of fear throughout the land. Consumer confidence has hit the floor and retail trade is at a virtual standstill.

Finance Minister Michael Sarris has said that capital controls will be “within the realm of reason.” Un confirmed reports said these controls would only apply to international transactions but that seems unlikely.

The Chairman of the Cyprus Chamber of Commerce, Phidias Pelides, told Reuters, “We have been assured that limitations will not affect transactions within Cyprus at all. Where there will be limitations is on what we spend abroad and also on capital outflows.”

Sarris has said his goal is to limit the damage caused by withdrawals inside the country. However, CNBC reported that national withdrawals would be closely monitored and very restricted.

Under the terms of the 10-billion euro bailout, certain international investors could take 40 percent losses. All deposits over 100,000 euros will be taxed. Russian investors are especially vulnerable.

Russian Fallout

Russia, who failed to work with Cyprus to eliminate the demands of the Troicka, stands to lose the most in the current plan. The country has said that their current loan of 2bn euros to Cyprus would be under review unless their investors are treated fairly. In Russianese, that means suffer no losses.

Losses are unavoidable for Russian investors and companies that have used Cyprus to stash away tax-free funds. Russian Finance Minister, Anton Siluanov said, “If there are such measures, this will not foster trust but only provoke additional problems for participants, depositors.” It was clear that Russia will be unwilling to restructure the Cyprus loan if the capital controls hurt Russian investor liquidity.

On The Ground

Civil unrest reigns in capital. Students marched on Tuesday and bank workers lined the streets in protest on Wednesday. Laiki or the Cyprus Popular Bank, the country’s second largest bank has been closed. Loans and account under 100,000 euros have been moved to the Bank of Cyprus. Deposits at Laiki and the Bank of Cyprus over 100,000 euros are frozen.

The two-week shutdown on the banks have raised havoc across the economy. Supermarket shelves are not stocked. Retail sales are non-existent. Shop owners have no access to their funds. Bills are not being paid. The economy is paralyzed and cash rules the day.

Italy Adds Fuel to Fire      

The political chaos in Italy has added to the crisis level of the euro zone. Without a new president, the country has no direction, no public mandate and is subject to the policies of the Troicka. That means unwelcome austerity, no growth, tough banking policies.

Italian bonds struggled at Wednesday’s auction. Long-term and mid-term Italian bonds sold at multi-month highs and auctions were not fully subscribed.

The euro fell to 1.2772 USD, down 0.7 percent at one point. The Dow Jones slid off yesterday’s highs and was struggling to maintain a 38 point loss. The S&P 500 fell 5.91 points. Benchmark US 10-year Treasuries climbed 19/32 to a 1.8454 yield.

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