Weekly wrap: Cyprus concerns overshadow signs the US economy is growing slowly but surely
Global equities fell as investors were rattled by uncertainty caused by Cyprus’ controversial bailout plan. The government rejected a tax of up to 10% on bank deposits in exchange for a €10bn bailout. Cyprus was given a Monday deadline by the European Central Bank to raise the funds it needs for a bailout to avoid a collapse of its financial system and possibly an exit from the euro. Despite this, Spanish and Italian 10-year government bond yields fell (prices rose) to 4.85% and 4.52% respectively at the week-end. Nervous investors sought out gold, driving the gold price up to $1,608 per ounce. Disappointingly, the Composite Markit Flash Eurozone Purchasing Managers’ Index (PMI) fell from 47.9 in February to 46.5 in March, signalling further contraction in business activity. Adding to the pessimism, the Munich-based Ifo Institute business climate index fell for the first time in five months, to 106.7 in March. The British chancellor’s Budget speech revealed corporation tax cuts, national insurance breaks for small companies and assistance for home buyers. This year’s growth forecast was cut from 1.2% to 0.6%, while public borrowing would increase by more than thought, to £114bn in the fiscal year 2012-13.
US markets were buoyed by reassurance from the Federal Reserve (Fed); the Fed said it would stick to its bond-buying stimulus programme as unemployment remained high. Other supportive news included data from the National Association of Realtors, which showed sales of existing homes in February accelerated by 0.8% annualised, its fastest pace in three years as borrowing costs fell. Meanwhile, the Conference Board Leading Economic Index rose by 0.2% in February, following a 1% fall in January.
Japanese exports fell 2.9% year-on-year in February after a strong 6.3% rise in January. Lastly, an upbeat report on China’s manufacturing revealed a pick up in the sector. The HSBC Flash China Manufacturing PMI rose from 50.4 to 51.7 in March, more than analysts’ expectations.
Cyprus bailout deal reached at the 11th-hour
It is a less busy week for economic data releases and central bank meetings ahead of the Easter break. An exception is Cyprus, which has seen an 11th-hour €10bn bailout deal reached with its international lenders in the early hours of Monday morning. The deal avoids a controversial levy on bank accounts but will force large losses on big deposits in the island’s two largest lenders. Elsewhere, notable releases will include February euro area consumer price inflation (CPI) on Wednesday, the March euro area economic confidence survey and in the UK, the GfK Consumer Confidence Index reading for March.
US gross domestic product (GDP) growth in the fourth quarter of 2012 is likely to rise from an annualised 0.1% quarter-on-quarter to 0.5% because of revised monthly construction spending. Tuesday may reveal another solid gain in US house prices; the January S&P Case-Shiller Home Price Index is expected to rise by 7.9%, from a 6.8% rise in December. Analysts are looking for growth of 3.8% month-on-month in durable goods orders for February compared to a 4.9% fall previously. The Conference Board Consumer Confidence Index for March could remain largely unchanged from February’s 69.6 level. On Friday, February personal income and spending data is released; a rise of 0.9% in personal income and a rise of 0.6% in personal spending is forecast due to higher energy prices.
Elsewhere, in Japan, industrial production in January is likely to rise after falling by 0.3% month-on-month in December. Meanwhile, February’s unemployment rate is likely to remain unchanged from January.