2-Minute Primer: Why Cyprus Is Driving the Market

Following last week's repeated stock market highs, the tone at the start this week is decidedly bearish, with unsettling news out of the eurozone rattling markets worldwide. U.S. stocks opened lower this morning, with the S&P 500 (SNPINDEX: ^GSPC  ) and the narrower, price-weighted Dow Jones Industrial Average (DJINDICES: ^DJI  ) down 0.62% and 0.31%, respectively, as of 10:05 a.m. EDT.

This week
This week will see the outcome of the Fed's regular FOMC meeting on Wednesday. Don't expect any changes to rates or the bond-buying program, but investors will be carefully parsing the Fed's language for clues on the "flight path." On the same day, we'll have news that actually relates to corporate fundamentals, as Oracle and FedEx both report earnings.

The Cyprus situation in three questions
1. What happened in Cyprus?

Early on Saturday, Cyprus, which sits off the coast of Greece, agreed to a controversial bailout plan of its banks with international lenders, including the European Union. The plan is unusual because it effectively forces all
bank depositors to take a haircut (6.75% on accounts with less than 100,000 euros and 9.9% on accounts above that threshold; I write "effectively" because, nominally, it is being packaged as a tax). Importantly, according to the Financial Times, "the depositor levy was demanded by a German-led group of creditor countries to bring down the bailout's price tag from 17 billion euros."

2. Why does this matter?
Cyprus is, in itself, insignificant in economic terms. However, the "Cypriot example" is a stark reminder that the eurozone crisis writ large is alive and well. Germany is making perfectly clear that it won't pick up the full tab for its Southern European partners. Spaniards and Italians must now be wondering whether their deposits are entirely safe, given the debt burden weighing on their banking system and their sovereign, respectively. Last year's pledge from European Central Bank president Mario Draghi to do "whatever it takes" to save the euro was a powerful salve for the crisis, but its main effect was improving investor sentiment -- which can change quickly.

3. What is the impact?
European stock markets are in the red today, with Italy and, particularly, Spain suffering the heaviest losses. Spain's banking system has yet to fully address the legacy of the property boom and crash (take a look at Banco Santander's (NYSE: SAN  ) share price this morning). Wall Street is also down, and big banks are especially sensitive to this type of macroeconomic headline risk: Bank of America, Citigroup, JPMorgan, Goldman Sachs, and Morgan Stanley are all underperforming the broad market today.

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  • Report this Comment On March 18, 2013, at 12:07 PM, watcherandwaiter wrote:

    So, is this their latest scheming technique? (bankers). Are we willingly to sit for another trim,or haircut? (6.75% /9.9%). i DON'T THINK SO!

    When they stand on the lemming ledge,or prickly plank first,then I may follow,not before!

    What they're proposing is only another cleverly deceptive,end around, newly devised plotting mechanism,to achieve a twisted means to their end.

    Are you mad enough yet ?, What may it take before we all go down in their ship? As for me in the private sector,I've seen and heard all I want to know,sadly,very sadly,(sharpening my pitchfork).

    w/w

  • Report this Comment On March 19, 2013, at 1:27 AM, awallejr wrote:

    Personally I think it is much ado about nothing. I can understand the Germans being pissed that they have to bailout Russian Mafia money. But this doesn't mean Spain or Italy will follow which the so called "pundits" try to argue. Yes let's fear "contagion."

    All this is is an excuse for the market to correct which it needs to do. No one is waking up and saying "OMG CYPRUS LET"S SELL."

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