Commentary:
Last week was certainly interesting. There’s already been plenty of commentary on the whole Cyprus situation, so the only point I wanted to add is this: laws, rules and precedents are made to be broken. When push comes to shove, most policy makers are quite willing to break new ground, as long as there is political cover. Assessing if and when that happens is likely to continue to be a key part of the macro landscape in the coming years. In the meantime, however, Merkel comes out of this looking like Einstein.
More broadly, the Cyprus situation appears to have partially masked renewed weakness in EU data. The weak PMI prints last week was as surprise to the market, and reflects part of a broader downturn in EU growth expectations. At this juncture, there is little evidence that suggests things will improve, given the austerity backdrop and unwillingness of the ECB to ease policy further. However, choosing the best way to play that story isn’t particularly clear cut. I’ve noted in the past that European equities have reached new highs even as earnings expectations continue to deteriorate. Without a doubt, easy monetary policy is the largest driver for that. Since policy is expected to remain easy for the extended future, in the absence of a deleveraging event, it is not clear whether EU equity prices and earnings expectations will re-couple. In currency space, the EURUSD cross has been a bit of a ping pong, alternating between EU worries and US optimism. Some uncertainty regarding whether the acceleration in US growth has peaked adds some uncertainty. At 1.30, the cross does not look particularly misvalued, although a continuation of current trends suggests the possibility of some more downside. That leaves rates, which is uncomfortably rich, but still appears to offer the highest possibility of gains over the medium term. EU policy makers have repeatedly chosen to move incrementally, which extends (and arguably worsens) the rebalancing process.
In the US, the backdrop continues to appear strong. Interestingly, WTI oil prices have started to strengthen again. This is interesting because WTI has been a decent leading indicator for the US stock market over the past few years.
With stockpiles still plentiful, (chart of crude in storage below) this suggest good underlying demand could be the predominant driver.
Finally, this note from BAML suggests a lower risk of a correction for now: (h/t/ Ritholtz)
This appears particularly pertinent given the positive month end seasonality this week.
Notable:
- Cyprus reached an agreement with the Eurogroup over the weekend. Depositors under the guarantee threshold of 100k euro will not take any losses. Laiki Bank will be restructured into a good bank and bad bank with large deposits remaining at the bad bank. The bad bank will then be run down over time. The Bank of Cyprus will see a deposit-equity swap take place, designed to achieve a 9% capital ratio at the bank. The finance minister said he expects losses for uninsured depositors to reach 30%. Capital control limits are in place with daily withdrawal at ATM’s limited to 100 Euros per customer. h/t JC
- Dutch Finance Minister Jeroen Dijsselbloem said the Cypriot rescue plan may become a template for euro-area bank bailouts, which sent risk assets lower. Later, however, a spokesperson said that he was misquoted.
- JPM summarized some surveys in Japan on ‘Abenomics:’
- Japanese see current market movements in a favorable light and support Abenomics, but 70% do not believe their salary will increase.
- Among those who expect their salary to increase, 50% answered that any increases will be put into their deposit account.
- Only 15% of business leaders said they will increase salary payments in some form, and 86% said a higher USD/JPY and Nikkei index do not have a positive impact on their hiring plan.
- Only 5% of business leaders said their ideal level of USD/JPY is above 105 and 48% of them said their ideal level is below 100.
The SF Fed thinks China’s economic numbers are legitimate Upcoming Data:
- Tue: US DGO, Consumer Confidence, New Home Sales
- Wed: UK GDP, EU Consumer Confidence, Canada CPI, US Pending Home Sales
- Thu: Month End, German Retail Sales, Unemployment, EU Money Supply, Canada GDP, US Jobless Claims, Chicago PMI, USDA Ags Data
- Fri: Good Friday, US Personal Spending, Core PCE, UMichigan Confidence
- Mon: South Korea HSBC Mfg PMI, China Mfg PMI, US Mfg PMI, RBA
Global Macro Trading 