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Tuesday 20:00 GMT. Uncertainty over the situation in Cyprus made for another nervous session in the markets, as the country’s parliament overwhelmingly rejected a tax on bank deposits, throwing into question plans for an international bailout.
“This is a major concern,” said Kathleen Brooks at Forex.com. “Cyprus needs to get its hands on cash urgently, its cash reserves are running dry and it can’t afford to fund its troubled banking sector as its banks’ collateral is too low quality to even meet the basic standards required to access cheap, unlimited funds at the European Central Bank.”
The ECB responded to the Cypriot vote by reaffirming its commitment to provide liquidity, within existing rules. That helped the euro pare an earlier fall that had seen it touch a four-month low against the dollar.
Global equities also rallied off their lows, with the FTSE All-World index trading 0.3 per cent lower and the S&P 500 ending down 0.2 per cent. In Europe, where stock markets had already closed by the time the news of the vote emerged, the FTSE Eurofirst 300 finished with a loss of 0.4 per cent.
Spanish and Italian stocks came under greater pressure amid fresh concerns about the potential for contagion from Cyprus. The Ibex 35 index in Madrid fell 2.2 per cent and the FTSE MIB in Milan shed 1.6 per cent.
Steve Barrow, strategist at Standard Bank, argued that Cyprus did not represent a systemic risk to the eurozone. “If policy makers had thought it was a systemic threat they would have presumably stumped up the money; after all, when you’ve already bailed out Greece alone to the tune of well over €200bn, what’s €6bn if your credibility could be at stake?” he said.
“But it is clearly a mark of the concern among larger eurozone countries, especially Germany, that these bailouts are turning into black holes and politicians sense that electorates want every last cent costed out.”
The extent of the nervousness among investors was evident from a “flight to safety”, notably in highly-rated government bond markets such as the US and Germany.
The yield on German two-year government bonds turned negative for the first time since early January, while that on the 10-year Bund dipped 6 basis points to 1.35 per cent, a low for the year The 10-year US Treasury yield was down 6 basis points at 1.90 per cent.
Other assets regarded as “havens” also moved higher. Gold was up 0.4 per cent to $1,612 an ounce, even as the dollar gained 0.4 per cent against a basket of currencies. The Japanese yen also benefited from the jittery mood in the markets.
But industrial commodities remained under pressure from concerns that the latest bout of eurozone woes could hamper the global economy. Copper touched a near seven-month low in London as it shed 1.2 per cent, while Brent crude oil hit a three-month trough below the $108 a barrel mark.
However, for many commentators and investors, particularly those who are US-based, this week’s risk asset sell-off has represented little more than a squall in the continuing bull run that last week took the FTSE All-World index to fresh four-year highs and the S&P 500 to within 1 per cent of record levels.
There is a strong view that the market remains powered by optimism over the US economy, as the housing and jobs sectors continue to improve, and underpinned by continuing central bank largesse.
“Over the past four years, bearish headlines triggered “risk-off” corrections in global stock markets including the US,” said Ed Yardeni at Yardeni Research. “This year, bad news about Europe and rising risks of disastrous geopolitical events might actually boost US stock prices, as long as the US economy remains resilient and performs well in the face of overseas turmoil.”
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