SINGAPORE, SINGAPORE--(Marketwire - March 18, 2013) - In his Market Brief of The Week for 18 March, leading global foreign exchange trader, educator and author Mario Sant Singh whose views are widely sought after in the Forex industry, focuses on the Cyprus fiscal crisis and possible contagion:
Key Events to Focus On This Week
- German ZEW Economic Sentiment
- Euro Zone Manufacturing Purchasing Managers' Index (PMI)
- German Ifo Business Climate
- Reserve Bank of Australia (RBA) Monetary Policy Minutes
- FOMC meeting
- New Zealand's Gross Domestic Product (GDP)
- HSBC Flash China Manufacturing PMI
Key Events Last Week
- U.S. Retail Sales surged to 1.1% MoM
- Reserve Bank of New Zealand (RBNZ) keeps Official Cash Rate (OCR) unchanged at 2.5% with extremely dovish message
- Australia's employment change added 71.5k in February, highest in 21st century
- EU Finance Ministers agreed to extend maturities on bailout to Ireland and Portugal
- EU offered EUR10 billion bailout to Cyprus with deposit tax condition
To view Figure 1, please visit the following link: http://media3.marketwire.com/docs/fxpfigure1-031813.pdf.
Cyprus - Crisis trigger in spring?
Cyprus's President Nicos Anastasiades will seek approval of the deposit tax agreement from Parliament later in the day; he needs more than 28 seats to avoid collapse in the country. His party owns 20 seats in the Parliament, together with support from the Democratic Party's (DIKO) eight seats; he needs to gain one more seat. I project a very low chance of "chaos" appearing later in the day. However, a "bank run" in the country might not be avoided. A similar situation might spread to the Italian banking system later, that is the contagion risk, as negotiations on fiscal and banking rules could add further stress to the fragile economy in the region. Anastasiades said Cyprus had a choice between "a catastrophic scenario of disorderly bankruptcy, or a scenario of a painful but controlled management of the crisis."
The European Central Bank (ECB) doesn't seem intent on exempting the tax imposition, even with those whose deposit is less than EUR100,000. Yet, I do not think the "haircut" measures would be applied in Italy and Spain should they need bailouts. The call for the "deposit cut" was mainly to bring some discipline to the Cypriot banking system, including Anti-Money Laundering (AML) as well as high risk investment. However, I do not rule out the "knee jerk" reaction in peripheral countries such as Spain and Italy, as the market might be concerned whether the depositors' haircut will lead to bank bondholders in the future.
There have always been "crisis triggers" in the Euro Zone in spring since 2010, or the theory of "sell in May and run away" after a bullish first quarter. There is a chance Cyprus will trigger the "crisis" in 2013, providing excuses for traders to sell off equities, the Euro and peripheral sovereign bonds.
To view Figure 2, please visit the following link: http://media3.marketwire.com/docs/fxpfigure2-031813.pdf.
Federal Open Market Committee (FOMC) - No major changes expected despite strong economic data
Nearly everything in the U.S. looks perfect now, such as the labor market, manufacturing and personal consumption. The tax hike and sequestration do not seem to be concerns at this moment.
The U.S. Non-Farm Payroll (NFP) added another 236,000 jobs in February, and initial jobless claims declined to 332,000 last week, sending the 4-week average claims to the lowest level since 2009.
Factories also expanded at the fastest pace in the past two years, with the Institute for Supply Management (ISM) manufacturing rising to 54.2. Retail sales also reported a 1.1% MoM growth in February.
To view Figure 3, please visit the following link: http://media3.marketwire.com/docs/fxpfigure3-031813.pdf.
The Beige Book clearly indicated that the economy was expanding at a modest to moderate pace; nothing has been changed from the prior version. Both Ben Bernanke and Janet Yellen highlighted that a premature exit from policy accommodation would incur higher costs than the potential costs associated with a further expansion of the Federal Reserve's (Fed) balance sheet. Overall, nothing has changed to trigger a policy shift from the Fed, and I do not see the upcoming FOMC event bringing any significant effect to the financial world. With that said, the FOMC outcome this week will be meaningless to investors.
Given the uncertainty of the labor market for the entire year, since the sequestration is expected to cut government spending by around USD85 billion in 2013 according to the Congressional Budget Office (CBO), as long as inflation is below the 2% horizon, the market doesn't seem interested in the Fed's script. Either "withdrawal" or "topping up" should not even be a topic in the near term.
Investment Insights - Possible short-term "bearish momentum" in Euro equities due to Cyprus Haircut
As mentioned earlier, the imposing deposit tax in Cyprus might produce a "knee jerk" reaction at least, or even trigger a "temporary crisis" in the near term. Equities investors will probably use it as an "excuse" to sell Euro equities or prepare to buy them again at cheap prices in weeks or months.
The price of the Euro and bond yield spreads could be the indicators here. Based on the technical view, the coming resistance of the Euro STOXX 50 stands at 2730, and the next support is around 2689 in the H4 Chart.
To view Figure 4, please visit the following link: http://media3.marketwire.com/docs/fxpfigure4-031813.pdf.
ABOUT MARIO SANT SINGH
Mario Singh is the Director of Training & Education at global retail Forex brokerage FXPRIMUS. He has appeared as a guest expert on CNBC more than 35 times to talk about foreign exchange markets, and is a regular contributor to top investment publications and online portals. Known as a brilliant and intense communicator with a unique ability to 'keep Forex simple' and a mission to help every man-in-the-street to trade profitably and responsibly in the Forex market, more than 20,000 people have attended his Forex trading programs. He is the only Forex trader in Asia invited to train Julius Baer Private Bankers - the third largest Swiss Bank, and ICBC, China's largest commercial bank. Mario is also author of the best-selling book, 17 Proven Currency Trading Strategies: How to Profit in the Forex Market. (Wiley Publishing).
FXPRIMUS offers retail traders a level of trade execution, service quality and fund safety that are normally reserved only for the largest investors. Serving traders in 205 countries across 6 continents FXPRIMUS combines an unmatched level of fund safety with regular independent audits of company financials and Straight Through Processing, top notch execution with tight spreads, prompt and responsive customer support, ISO 27001 certification in Information Security and an industry-leading trader toolset that includes free access to powerful trader tools and personal coaching via FXPRIMUS Coach. FXPRIMUS truly is The Safest Place To Trade.