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UK stock market commentary (March 21, 2013): After the excitement of the Budget Cyprus is back in focus

Markets remain in a state of flux as the ongoing battles in Cyprus for them to avoid a default and exit from the eurozone continue. For as long as there remains no deal for the small island the prospect of any further gains in risk assets are very slim. The banks can’t remain closed forever and there’s no knowing what will happen when they reopen, which is now expected to be as far out as next week! The likelihood however is that people will be queuing up frantically to withdraw their funds, whether those funds will be slightly less than they were before with a levy having been applied to them is yet to be seen, but another proposal and a vote on that is expected today. So who knows what will happen or what deal will be struck but one thing that investors have learnt is that they should expect the unexpected.

Despite all this uncertainty and the potential for the little island to actually be booted out of the eurozone, the markets have held up remarkably well. Now that the dust has settled from the Budget yesterday the focus is back on the eurozone and Cyprus. It is still hard to believe that a member of the single currency that is so small in terms of its economic size, could potentially rip the eurozone apart. The problem is that if it can’t raise the cash it needs to avoid a default then an exit would result and that would set a precedent which could potentially pave the way for other countries to default on their debt and exit as well. This would well and truly set the dominos falling and could lead to a massive sell off in the markets. If this were the case then those clients that have been so resolute in holding onto their short positions will be making hay.

Yesterday the Dow rebounded 55 points to 14,511 after having retraced for a few days, largely on the back of the Federal Reserve’s reassurance it will keep buying bonds to spur economic growth. At its interest rate meeting yesterday, the FOMC left its benchmark rate unchanged reiterating it will stay near zero as long as unemployment remains above 6.5%. At the same time, forecast for economic expansion stands at 2.3% to 2.8%, marginally lower than earlier predicted.

This has meant that this morning the FTSE opened flat to slightly lower but in the early stages of the session the index has come under some selling pressure with bears pushing it back below 6400 to 6390 at the time of writing. Some really bad and far worse than expected German PMI data has just been released and so that’s putting the pressure on equities.

Amid a supportive statement for the global markets from the Federal Reserve, Cyprus fate is yet to unfold as the country seeks financial aid from Russia. With the Cypriot banks reported to stay closed this week or until a deal is reached, how the situation will end is anybody’s guess. Nonetheless, going by the principle that no news is better than bad news the euro found strength to gain 52 pips versus the greenback closing at 1.2934. The German PMI data as mentioned has also meant the single currency has just taken a 180 degree turn and is heading lower with EUR/USD trading at 1.2890 at the time of writing.

Gold prices were on the defence even before the Fed’s statement on profit taking after rallying for four days. Chairman Ben Bernanke has triggered renewed optimism in the global markets, discarding the latest concerns due to the Cypriot banking crisis. That sent gold prices even lower to $1605.7, $7.4 decline for the session.

The WTI crude prices recovered 94 cents yesterday to finish at $93.35 following an ongoing pledge by the Federal Reserve that it will keep the pace of asset buying to improve growth and the job sector ‘substantially’. At the same time, the US Department of Energy indicated a surprise fall in the weekly crude oil stockpiles which was also a supportive feature.