"Good luck with your next bailout Europe" is most likely what the Russians are saying or at least should be. Watching EUR/RUB plummet yesterday in a hair’s breadth looked only to be the beginning of long draw out retaliation plan to a possible +40% Cypriot deposit haircut on accounts not arbitrarily protected. Mind you, this market needed very little Russian help to pummel the 17-member single unit down to current size. The head of the group of euro-finance ministers alone was capable of doing all the dirty work.
Capital markets have remained wary ever since Dijsselbloem was reported to have said that the Cyprus bailout deal was the new European template – a statement worthy of selling the EUR every time. Shareholders, bondholders and uninsured depositors are naturally feeling that their investments in European banks are not safe in the event of restructuring. Rules that are rewritten at anytime have their consequences. The EU is now required to do more than just damage control from the Dijsselbloem “template” comments.
The slide in riskier assets despite his retraction indicates that investors remain skeptical that all euro-deposit accounts are safe in any financial restructuring process. It does not seem to matter how many ECB members come out and clarify the “template” statement, while arguing that Cyprus was a once-off, investors are still not sure whether that is true or if a precedent has been set. This has allowed the EUR to continue to lag while the periphery yields are flat.
Where is the country’s growth going to come from? Not being able to control your own domain causes paralysis. Capital markets should expect that any Cypriot capital control to only have a devastating impact on the already crippled banking sector of the country as well as the economy. Being small and a member of a union while beholding to an exchange rate, any extreme capital control hardly allows a country to be able to benefit from a weaker exchange rate. Without, the country will never survive and will be back, cap-in-hand for round two of capital injections while other highly indebted euro-countries will suffer a similar fate.
Under the weight of fiscal tightening and high debt, the region's weaker peripheries are expected to struggle. For most of this quarter market participants have been thinking about what might cause the eurozone’s crisis to take a decisive turn for the worse. Investors have waited for periphery yields to blow out, a government-less Italy to implode or weaker German data to convince investors to erect a “for sale” sign. However, nothing doing until now – perhaps Cyprus coupled with the Dijsselbloem comments could well be that “divine moment” or maybe we will still have to wait for Spain to return to the cliff edge as a result of a dreadful GDP reading brought about by a collapse in the availability of bank credit.
This week, investors may want to look again at U.S. GDP revisions as an excuse to healthily short the EUR once more. Analysts are anticipating a wider divergence between the two economies, Europe and the U.S., after the released numbers. The key is to watch the Tsy/Bund yield spread. However, before then, this market has to contest with today’s U.S. durable goods, confidence, home sales and 2-year note supply.
Stronger economic news may be able to get this market to focus following the agreement on Cyprus. The majority anticipate this morning's headline U.S. durable goods orders to likely post a "partial rebound" from January’s drop (+3.9%), while core measures should partly reverse some of January’s gain (+0.7%). U.S. consumer confidence is expected to rise to a five-month high this month on better economic news (67.9), while last month’s new home sales eases to +426k after a sharp advance in January. Follow the yields. Any further signs of U.S. economic strength will attempt to push U.S. 10-year yields above the psychological +2.00% near-term watermark – a dollar support beam.
After yesterday’s “buy the rumor sell the fact” the single currency’s overall bearish sentiment remains intact. Price action is just not showing it as corporate buyers have temporarily offset any speculative moves lower. Middle East and Hedge funds are reported sellers on the topside while large barrier options below at 1.28 and 1.2825 continue to define some support. The technical gurus that this outside bearish reversal opens the door for further downside risk to an early 1.2700 handle, minor support and potentially expose 1.2680/62 longer-term support.