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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

What Cyprus "Bailout" Means for Stocks and Gold

Commodities / Gold and Silver 2013 Mar 19, 2013 - 12:36 PM GMT

By: Money_Morning

Commodities

Worries over the plan to force bank depositors in Cyprus to help fund a $13 billion international bailout rattled global equities and sent the U.S. stock market today (Monday) lower.

Right after the open, the Dow Jones Industrial Average, the Standard & Poor's 500 Index and the Nasdaq were all sharply lower.


By mid-afternoon, all three indexes remained in negative territory with the Dow down 4.76, or .03% at 14,509.03; the S&P down 2.97, or 0.17%, at 1,557. 73, and the Nasdaq down 2.11, or 0.11%, at 3,247.

Sending global markets lower Monday was the unprecedented agreement reached this weekend over Cyprus' bailout plan.

The proposed plan - by representatives of the International Monetary Fund, the European Central Bank and Eurozone's finance ministers - includes taxing deposits over 100,000 euros ($128,950) at 9.9%, while those with less than that amount would be subject to a 6.75% levy.

The aim is to raise 5.8 billion euros ($7.52 billion) that would go toward the $13 billion international bailout of the country.

Global Concern over Cyprus Bailout
The tax riled Cypriots and stoked investors' fears about Europe's other ailing economies.

"The very nature of banking has been shaken to its roots with this decision, for banking depends upon trust that bank officials will always treat deposit as sacrosanct," Dennis Gartman wrote in his daily Gartman Letter. "Trust runs to the very core of money and banking and trust has now been shattered, torn asunder, broken and destroyed."

European markets were all lower Monday. After tumbling as much as 1.4%, European shares ended the day down 0.2%. London's FTSE 100, Frankfurt's DAX and France's CAC-40 lost 0.3%, 0.3% and 0.4%, respectively.

Investors worldwide are worried taxing depositors sets a bad precedent that could put other fragile banking systems at risk, and some feared runs on regional banks.

"The news from Cyprus is not good. Haircuts for depositors were not expected, and it implies several dimensions of increased uncertainty," Jens Nordvig, currency strategist at Nomura Securities, told CNNMoney.

The Cyprus bailout differs from those for Greece, Portugal, Ireland and Spain in that it's the first that would tap into people's savings.

Incensed, Cyprus is preparing a counter-proposal that would more equally distribute the tab for the bailout.

Cyprus President Nicos Anastasiades delayed an emergency vote in Parliament on the bailout plan until Tuesday.

Monday is a public holiday on the island with banks closed and calm. Tuesday could be a different story.

How Cyprus Will Affect Gold
Speculation that such a bailout could destabilize the Eurozone sent safe haven gold higher.

"Longer term, this paints a pretty ugly picture for the Eurozone. This risks blowing up into something much bigger and worse," Brian Jacobsen, chief portfolio strategist for Wells Fargo Funds Management, told the The Wall Street Journal.

The fresh shadow of uncertainly the Cyprus bailout has cast globally creates a strong case for gold.

"Gold should profit from the possibility that savings are no longer regarded as safe, and should thus enjoy strong demand in the current market environment. We therefore expect to see [gold] prices continuing to rise," analysts at Commerzbank said in a note.

Explaining the yellow metal's recent slump and current prospects, UBS global analyst Tom Price told CNBC, "One of the reasons gold has been coming off is that there has been a view that the risk in Europe was limited and most of their financial market issues were resolved. This Cypriot package highlights a new risk relating to the term of the deal. This uncertainty could provide a brand new support for gold for days or even weeks."

In early-afternoon trading, gold gained $15 to $1,680.90. Silver tacked on 19 cents to $29.06

Source :http://moneymorning.com/2013/03/18/how-the-stock-market-today-digested-cyprus-news/

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