Market pain persists as Cyprus becomes the next bailout casualty
The Island of Cyprus became the latest European nation to formerly request financial aid overnight with the contagion effects from neighboring Greece finally taking its toll. In a Statement the Government noted "The purpose of the required assistance is to contain the risks to the Cypriot economy, notably those arising from the negative spill over effects through its financial sector, due to its large exposure in the Greek economy." Although analysts expect Cyprus will need to tap the EFSF for a relatively small EUR4-6 billion compared to that of significantly larger needs for Greece, Ireland, Portugal and Spain – it’s a testament to the challenges smaller Euro-region countries are facing given the contagion effects of its larger neighbors.
Meanwhile, the set-backs continue to come thick and fast for Greece with Finance Minister Vassilis Rapanos resigning for health reasons. Prime Minister Antonis Samaras who has also been hospitalised this week for eye surgery is not expected to be present at the EU Summit which begins on Thursday.
European equities recorded solid losses with the DAX and CAC sliding 2.09 and 2.24 percent respectively. After signs of positive momentum at the end of last week, Spanish government bonds slid overnight with corresponding yields rising across the curve. Spanish debt yields of a 10-yr maturity bounced off lasts weeks close of 6.25 percent to around 6.6 percent over the course of the session with investors flocking to the safety of German bunds. Spain has now formerly requested financial aid in order to recapitalize its struggling banking sector with a capacity of up to EUR100-billion able to be borrowed on a conditional basis.
It appears market participants are setting the bar low ahead of the EU Summit in Brussels this week with global equities and high-beta currencies resuming a south bound trajectory.
The Euro made a break to the downside of $US1.25-figure overnight falling to lows of $US1.2470 before moderate buying kicked-in with commodity currencies the AUD and NZD following a similar path. The sell-off across risk barometers such as U.S equities had clear implications for the Aussie dollar which fell to lows of 99.68 US cents but has since squeezed out mild gains and remains slightly above US dollar parity. In typical risk-off fashion, the U.S dollar outperformed its major counterparts with the Japanese Yen the only major rival to gain the upper hand with the USDJPY pair sliding back below Y80-figure.
In the absence of local economic feedback, we anticipate regional equities to provide the direction for currencies in domestic trade and Assistant RBA Governor (Financial Markets) Guy Debelle will today be a panel discussant at the Mortgage and Finance Association of Australia in Adelaide.