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UK stock market commentary (March 22, 2013): Deadline looms for Cyprus

No deal yet for Cyprus and the pressure on equity markets continues. An empty handed Cypriot finance minister returning from Russia maybe a sigh of relief for European leaders to the extent that it means that the eurozone is not to be saved by the Russians but it means that the looming deadline of next Monday when the ECB has said that it will put an end to providing liquidity to the country nears. So it’s four days and counting meanwhile the queues at the cash machines gets longer and longer and there are worries that as the deadline closes in there might be longer queues starting to form outside banks in other countries as Spain is seeing mass withdrawals already.

It doesn’t come as too much of a surprise either as anyone with large sums of cash deposits will be concerned to have seen the latest EU proposal to indiscriminately tax depositors. This sets a precedent and means there’s an increased chance that any other bank in the eurozone that comes under trouble might just see a similar “tax” applied to its depositors too. The “tax” proposal is still very much on the table for Cyprus even if it’s unlikely that any deposits under €100,000 will be affected. All these deposits that are being withdrawn across the eurozone have to find a home somewhere which means that they are either being placed under the mattress or to places like the UK and Switzerland, which is likely to push property prices in the UK even higher.

For once we saw the US economy acknowledging the situation in Cyprus and by extension Europe can still pose a risk to its recovery. As such, despite stronger than estimated numbers for the jobless claims the Dow Jones dropped 90 ticks to 14,420 after an ongoing banking crisis in Cyprus gave rise to street protests and put Brussels on high alert.

The sell off in the US indices means that across on this side of the Atlantic things have started in the red. With the week end just around the corner there maybe few buyers due to the uncertainty surrounding Cyprus and any fresh long positions today would be a pure punt on there being a deal struck whilst the markets are closed. Next Monday could be just as volatile as this Monday was, but that said we had been calling the FTSE 100 to open quite a few points lower at around 6360 however at the open the index isn’t so badly in the red trading at 6380 at the time of writing.

In trying to rescue its banking system, Cyprus struggles to find a plan B after rejecting the deposits tax suggested last weekend. However, so far a Russian rescue is not yet on the table as it could require (according to press speculation) a compromise on the newly found gas reserves near the southern shores. So worried investors headed to the exit door yesterday, pushing the euro 34 cents down to 1.2898.

With the banking crisis in Cyprus far from being solved, if anything getting worse as banks will remain closed this weekend, it came as no surprise to see gold edging higher yesterday. The precious metal rose $8.2 to $1614.3 on safe harbour demand with its short term trend now turning bullish.

Another set of positive US economic data failed to spur fresh demand in the energy sector as market participants were paying closer attention to Europe. It shows how quickly things can turn after reports of dropping oil supplies. The WTI crude prices lost 97 cents to $92.38, effectively giving up the previous day’s gains with extra pressure coming from a higher greenback.