The Cyprus ‘bailout’ or ‘bail in’ as some are calling it has led to a wide range of interpretations which has invariably caused the markets to react cautiously as investors try to distinguish what the long-term implications really mean. While we spoke about ‘robbery’ and capitalism being practiced yesterday, what needs to be said is that the move by the E.U. and the way in which it made Cyprus act can also be said to be more about politics than it had to do with economics. The costs of a bailout by the E.U. for Cyprus has been miniscule compared to what it has had to do for Greece and Ireland. So why was the ‘bailout’ much more punitive against Cyprus than the others? Why were the bondholders and certain depositors of Cyprus Popular Bank (Laiki) told that they would suffer something no one else up to this point in the E.U. has?
Was it a warning shot from Germany to Spain and Italy? Was it also a warning to Malta and Luxembourg who are similar to Cyprus in size and their regulatory environments? Was it a punitive action against Russia and a way of making them pay a share for the ever-growing E.U. financial crisis? All of the questions remain to be answered except to say it is a complex mix that is wide open for analysis, which opens the door for these type of punitive measures to be carried out again not only on another Cyprus bank in the future but quite possibly in Greece, Spain, Italy, or any other E.U. location. Of course the E.U. claims that this is a one-off and will not be repeated, but they wouldn’t say anything else.
Now while it is definitely not the end of the EUR, the psychology of the forex markets will continue to be tested. The Single Currency is trading at the lower ebbs of its short-term range as of this morning after gaining some yesterday. Gold is near 1603.00 as of this writing. Crude Oil has traded mildly up the past couple of sessions. Global bourses reacted well on Monday morning to the news of the Cyprus bailout, but as the day grew more caution made its way into the markets – including Wall Street which turned in a negative session.
There will be plenty of data from the States today including the CB Consumer Confidence reading, housing numbers from the S&P/CS Composite-20 HPI and New Home Sales, and Core Durable Goods Orders. While American investors are paying attention to the Cyprus situation it is more likely from the mode of behavioral inclination instead of a fear of contamination at this juncture. In other words investors in the States are looking to see how their colleagues in Europe act before they react to the Cyprus dynamic. The data from the States is important, but the ‘management of the investment mood’ will likely prove more critical than the reality of statistical outcomes.
Investing lives on emotion as much as it lives on hard numbers. The politics that are being played out from the European Union and their implications on Cyprus and the global marketplace have a tremendous effect on economics for better or worse. Traders will have to carefully look into the fog in order to find the correct avenues to traverse.