Thursday 20:00 GMT. Global equities ended a difficult week on a positive note, as scenes of relative calm in Cyprus after the reopening of its banks – albeit with strict capital controls in place – offered some reassurance to the markets following the turbulence that followed the island’s bailout.
Indeed, the S&P 500 US equity index managed to set a fresh record closing high after spending most of the week within striking distance of the previous peak, set in October 2007. The benchmark rose 0.4 per cent on Thursday for a gain over the holiday-shortened week of 0.8 per cent. The FTSE Eurofirst 300 index rose 0.4 per cent on Thursday but fell fractionally over the week.
However, the euro had a tougher time of it, in spite of a 0.3 per cent rise against the dollar to $1.2821 on Thursday – compared with the previous Friday’s close of $1.30. Earlier in the week, the single currency touched a four-month low, while peripheral eurozone government bonds also came under steady pressure. The yield on 10-year Spanish debt rose back above 5 per cent while that on its Italian equivalent climbed more than 20 basis points. Spanish and Italian equities also underperformed their counterparts in the rest of Europe.
The tensions regarding the eurozone also helped bolster demand for highly-rated government bonds. The yield on the German Bund fell 10bp over the week to 1.28 per cent, near a seven-month low, while that on the 10-year US Treasury shed 7bp to 1.85 per cent.
Gold continued to see-saw through the Cyprus crisis as investors weighed up its “haven status”. The metal ended the week below the $1,600 an ounce level, after slipping 0.6 per cent on Thursday.
Oil stood out in the industrial commodity arena as Brent crude climbed back towards $110 a barrel.
The week began on an optimistic note as riskier assets reacted positively to news that Cyprus had tentatively reached agreement over a €10bn bailout, which investors hoped might calm resurgent fears about the outlook for the eurozone as a whole.
However, the mood turned sour within a matter of hours as remarks from Jeroen Dijsselbloem, the leader of the eurogroup of eurozone finance ministers, raised the possibility that the terms of the Cypriot deal might be used as a template for how the region dealt with failing banks.
Mr Dijsselbloem subsequently attempted to “clarify” his comments – declaring that Cyprus was a specific case – but by then, in the words of several commentators, “the cat was already out of the bag”.
“Indeed the cat has been increasingly let out of the bag over the last week concerning the potential for different ways of resolving future bank/sovereign crisis, and these comments added to the risk than nothing is going to be off the table when it comes to any future issues for the banking sector,” said Jim Reid, strategist at Deutsche Bank.
Meanwhile, Italy’s political gridlock in the wake of last month’s inconclusive election heightened the sense of uncertainty as efforts by Pier Luigi Bersani, the leader of the centre-left Democrats, to form a minority administration looked increasingly doomed to failure.
The sense of uncertainty regarding Italy was viewed by many as a key factor behind disappointing demand at a debt auction held by Rome on Wednesday.
Tobias Blattner at Daiwa Capital Markets noted reports that Giorgio Napolitano, head of state, might consider appointing a technocrat to lead a broad coalition. “This, in turn, would hopefully pave the way for more effective elections later in the year, possibly in October.”
Tony Crescenzi, strategist at Pimco, said the situation in Cyprus had given investors reason to dust off several indicators of financial strain that had largely been ignored since last summer’s pledge by Mario Draghi, the president of the European Central Bank, to do “whatever it takes” to save the euro.
“The most comprehensive of indicators is Libor [the London interbank offered rate],” Mr Crescenzi said. “Libor over the past two weeks has moved higher. While the increase has been only about a half basis point, it is the change in direction that commands attention.
“Central bank liquidity should trump all else, but Cyprus and Europe’s persistently bad display of crisis management skills has revived fears of acceleration in Europe’s bank deleveraging, which represents one of the greatest threats to financial stability.”
There were few signs that the main source of that central bank largesse – the Federal Reserve – was likely to take away the punchbowl just yet. US data releases this week generally pointed to an economy that was growing modestly, but probably not enough to prompt a change of direction at the central bank, analysts said.
“It is likely that any exit is likely to be some time off, with the Fed clearly wanting to see signs that any improvement in the economy will be sustainable and sufficiently strong to generate enough new jobs to bring the unemployment rate down,” said Chris Williamson, chief economist at Markit.
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