Market Insight March 25

MARKET INSIGHT March 25
By Bryn Griffiths (CEO, Edge Capital Markets)

Equities
Global equity markets saw capital outflows this week as risk adverse investors took profits on the back of news that Cyprus’ banking sector was on the verge of collapse and a contraction in the euro zone manufacturing data and confidence. The all too familiar European debt crisis reared its ugly head this week when the European Central Bank instructed Cypriot banks to raise EUR5.8bln “as rapidly as possible” to stave off a banking collapse. The European Central Bank has indicated it will cut off funding as early as Monday 25th March. Early in the week, the Cypriot government voted against a proposal to haircut depositors which led the ECB to instruct them to come up with an alternative plan to raise the monies. Banks remained closed to allow them time to manage the situation post the outcome. In a moment of irony, it appears one of Greece’s banks is in talks to take control of all the assets of all the branches of a Cypriot bank operating in Greece to ensure its depositors are secure. Frying pan into the fire comes to mind here. Both the European Manufacturing and Services PMI data releases missed to the downside with manufacturing at 46.6 vs 48.2 and services at 46.5 vs 48.2. Both of these were forecast to improve from the previous month however theses releases now bring Europe back into the headlights. European Economic confidence was also expected to improve this month but this release missed badly to the downside as well printing 33.4 vs 43.7 forecasts. Asian exchanges (ex-china) saw strong outflows as the regions markets digested the news out of Europe. Funds flowed into china with the index closing the week up over 2% on the back of improved corporate earnings and the OECD increasing China’s 2013 & 2014 growth forecasts.
Weekly Moves: Australia 200 -3.0%, Hong Kong -1.9%, Japan -1.8%, China +2.2% France -1.9%, Germany -1.7%,
UK -1.5%, Dow Jones -0.0%, S&P500 -0.3%, Nasdaq +0.1%

Currencies
The US dollar saw small inflows during the week with the US Dollar index closing up 0.2%. The currency market had a choppy week looking for an outcome to the banking crisis in Cyprus. Not surprising the Euro fell against all the major currencies this week as funds flowed out of the region. The NZDUSD was the biggest beneficiary of these flows as the New Zealand GDP data release beat expectations by a whopping 1.5% vs 0.9% forecast. Albeit that the current drought impact is not included in this number it was a good one for NZ Inc all the same. The market shook off the statement by Chancellor of the Exchequer Osborne that the UK’s debt will rise more than previously forecast with the GBPUSD closing the week up 0.8%. This statement puts their credit rating under further pressure to be downgraded as it currently stands on negative watch. The USDJPY failed to kick on as there was no firm commitment toward further stimulus from new Bank of Japan Governor Kuroda from his first press conference. USDJPY closed the week down 0.9%.
Weekly Moves: AUDUSD +0.3%, GBPUSD +0.8%, EURUSD -0.7%, NZDUSD +0.9%, USDCAD +0.3%,
USDJPY -0.9%, USDCHF +0.2%

Interest Rates
This week saw defensive inflows as investors required safety from a potential Cypriot banking default. Yields across the 5-30yr maturities in all major markets fell. The European 3 yr old debt crisis is once again centre stage and all eyes will be on the negotiations between the Cypriot Government and the Troika (IMF, ECB and EU) to see what structure any bailout will eventually take. The Government of Cyprus voted against an across the board haircut on those who held deposits in Cypriot banks. If there is no outcome to these discussions the ECB has intimated it will no longer provide funding for Cyprus’ banks as early as Monday 25th March.

Closing Yields (Weekly Move):
3m 5y 10yr 30yr
US 0.07% (-0.02%) 0.80% (-0.03%) 1.93% (-0.06%) 3.15% (-0.06%)
UK 0.38% (+0.02%) 0.75% (-0.07%) 1.85% (-0.09%) 3.17% (-0.12%)
Germany 0.01% (+0.01%) 0.39% (-0.02%) 1.38% (-0.08%) 2.24% (-0.11%)
Japan 0.06% (+0.00%) 0.12% (+0.00%) 0.57% (-0.06%) 1.63% (-0.14%)
Australia 2.94% (-0.02%) 3.16% (-0.11%) 3.56% (-0.07%)

Metals
Precious metals saw mixed flows as a mix of good US economic data releases were over shadowed by the re emergence of debt issues in the Euro Zone. US Unemployment Claims (336k vs 343k) and the Philly Fed Manufacturing data releases 2.0 vs -1.6) indicated that the slow recovery in the US economy is continuing. The banks in Cyprus will have their funding halted by the ECB if the government cannot come up with a way to raise EUR5.8bln. Gold closed the week up on safe haven buying. Copper continued its recent decline as the market became more concerned about the global growth impact that continuing turmoil in Europe would deliver. Copper has now fallen nearly 5% in the last 8 weeks.
Weekly Moves: Gold +1.1%, Silver +0.0%, Copper -1.5%

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