Friday, 22 March 2013

Lawmakers earn a weekend off…

Cyprus remains at the forefront of investors’ minds following an ultimatum for the ECB that, if a deal is not reached by Monday, emergency liquidity assistance will be cut. We maintain a real sense of scepticism about whether the ECB, which has painstakingly vanquished ‘convertibility risk’ (the risk of a country leaving the euro), now wishes to resuscitate it by effectively ejecting Cyprus from the eurozone - and all for the relatively pitiful sum of around €5.8bn.

We understand a deal is to be reached within hours. Why not? It’s Friday after all – better to put this thing to bed and enjoy the weekend (admittedly more difficult with the banks closed). We understand the proposal may involve splitting Bank Cyprus Popular into a good and bad bank, with deposits of less than €100,000 being treated as sacrosanct within the good bank. That sounds sensible, as does the general principle of abiding by the spirit (as well as the letter) of EU deposit insurance rules.

The plan does seem to raise around €2.3bn less than was required so, unless there is some bail-in of the bad bank’s liabilities, then further funds have to be coming from somewhere with pension fund assets seeming a likely candidate – possibly involving the scheme buying state assets in a rushed 'privatisation'.

There was very little other good news from Europe yesterday as core Purchasing Managers Indices were very weak indeed – fitting our view that economic, as well as political, news is likely to pose a headwind for the euro and continental equity markets over the coming months. Only German Services kept its head above the 50 waterline which suggests expansion. French Services is now below its March 2009 level.

The concerning point about Cyprus and the PMIs is that, just over a week ago it seemed as though Germany would be more pragmatic about austerity in the aftermath of the Italian election result. Now that expectation has been turned on its head. Whether disappointments from Germany’s own manufacturing and services sector revive that pragmatism remains to be seen. Our best guess is that we will see the economic mindset shift this year, but over the coming months rather than weeks.

Equity markets look to be closing down a fairly muted 1% to 2% this week, with the worst losses from those markets closest to the Mediterranean. The euro is down less than 1% against the dollar.

Some good news for the week came from the US with congress passing a continuing resolution which means that spending is assured until September. We expected such a deal but are pleasantly surprised by its relaxed passage. No 11th or 13th hour deal for the US this time, perhaps even Congress tires of weekends lost in the vain hope of reaching a 'big deal' over tax and spending issues.

That means no shutdown at the end of this month which is clearly a positive and shifts the next fiscal hurdle to May, when the debt ceiling waiver expires.

Guy Foster
Head of Portfolio Strategy

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