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Markets on edge as leaders prepare Cyprus call

Markets on edge as leaders prepare Cyprus call

Cyprus remained centre stage this afternoon as eurozone finance ministers prepared to hold an emergency teleconference about the island’s precarious situation.

According to Reuters, the group will issue a statement after the call.

Earlier the European Central  Bank gave Cyprus until Monday to drum up the €5.8 billion it needs as part of a bailout from the 'troika' group that includes the ECB, IMF and European Union. The ECB said if no solution was found it would remove its liquidity support for Cyprus’ banks, precipitating a collapse in the economy.

Investors were resisting the urge to panic although nerves were stretched as Wall Street fell soon after the opening bell.

Eric Chaney, chief economist at AXA Group, the French insurance giant, urged investors to be cautious until a compromise was found.

‘Until the Cyprus case is solved, it is prudent for those willing to invest in euro denominated assets to be very circumspect, if not to stay on the side lines.’

With Cyprus’ parliament working on capital controls to prevent money pouring out of the country when its banks finally do reopen, JP Morgan Asset Management said the situation was highly uncertain.

‘However, keep in mind that we do not know yet whether there is indeed an end in sight. It is hard to judge right now whether Cyprus is a temporary headline, or a bigger problem to come for the eurozone as a whole. We will be watching how the eurozone’s periphery is affected by the Cyprus bailout in order to judge whether we are returning to a more stressful phase of the eurozone debt crisis,’ its global market strategists said in a note.

Renewed fears about the eurozone worried US investors, already jittery after shares in Oracle slumped 10% after analysts downgraded the tech giant after disappointing third quarter results.

The Dow Jones Industrial Average slipped 48 points, or 0.3%, to 14,462, the S&P 500 index shed eight points, or 0.5%, to 1,550 while the tech-heavy Nasdaq composite slid 0.7%, or 22 points, to 3,232.

This was despite encouraging economic data with Markit's Flash US Manufacturing Purchasing Managers Index rising to 54.9 this month from 54.3 and the Philadelphia Federal Reserve Bank reporting an increase in factory activity in its region. Meanwhile US house sales hit a three-year high in February.
   
It was a similar picture in London, where the FTSE 100 remained 0.6%, or 40 points, lower at 6,392 as eurozone fears overrode positive retail sales and an improvement in public sector borrowing.

In Europe, markets in Italy and Spain slid again leaving the FTSE Eurofirst 300 nine points, or 0.7%, down at 1,190. Sentiment had been further depressed by the release of bad PMI readings on the eurozone economy (See below).

The euro tumbled another 0.5% against the pound at 85.18p, although it held steady at $1.2920 against the dollar. Against the greenback the pound rose 0.5% to £1.5167 on continued relief that yesterday’s Budget did not weaken the Bank of England’s inflation target. 

'Systemic' Cyprus risk and weak data hit FTSE

09.01: The euro dropped and European shares slumped as weak economic data from the euro bloc added to growing concerns about Cyprus’s fate, offsetting better economic news from the US and China.

Despite gains in the US overnight, after the Federal Reserve showed no signs of slowing its QE stimulus scheme, Britain’s FTSE 100 dropped 0.6% to 6,394. The eurofirst 300 index fell by 0.5% to 1,193.

The euro was also under pressure, down 0.35% to $1.2886 as investors fretted over the fate of Cyprus, where politicians continue in their attempts to find a ‘Plan B’ to avoid burdening bank depositors. According to reports, a plan involving the nationalisation of pension funds was being discussed and Cyprus’s banks are to stay closed until next Tuesday.

The Cypriot crisis poses a ‘systemic risk’ to the whole eurozone, Jeroen Dijsselbloem, chair of the group of eurozone finance ministers said at a committee meeting this morning. Fitch ratings agency added in a note that the crisis highlighted the 'costs of policymakers' "muddling through" approach to the eurozone crisis'.

See Robert Kyprianou's analysis of Cyprus's problems here.

Adding to growing concerns over the eurozone, French and German flash PMIs came in lower than expected. Data company Markit reported the slowest growth of German private sector output so far this year, with the flash Germany index falling to 51.

China improvements

Countering the weak European data, the HSBC flash manufacturing PMI in China climbed to a reading of 51.7 in March, higher than market estimates.

Flemming Nielsen, analyst at Danske Bank, said that the rebound in manufacturing ‘should relieve some of the fears that the moderate recovery in China has stalled’.

The Fed had late yesterday kept policy unchanged, keeping markets on life support, while sounding a little more upbeat on growth and acknowledging improvements in the labour market.

Julia Coronado of BNP Paribas concluded from the Fed’s announcement that ‘while the pace of QE will be variable, the bias is toward more for longer’.

House builders rise again

In London, house builder shares continued to make gains after chancellor George Osborne announced plans to boost the housing market in yesterday’s Budget. Taylor Wimpey (TW.L) rose 2% to 92p, Barratt Developments (BDEV.L) was 1.2% higher at 259p and Galliford Try (GFRD.L) rose 1% to 950p.

In a note on the impact of Osborne's proposals on the housebuilders, Panmure Gordon analysts said that its 2013 forecasts were likely to remain unchanged. 'These measures are undoubtedly positive for the sector, though with the measures kicking in from January 2014 it is likely to benefit the sector from Spring 2014 and into 2015,' they concluded.

Resolution (RSL.L) rose by 1.3% to 273p – the top rise on the blue chip index – after Bank of America Merrill Lynch added the insurance company consolidator to its ‘Europe 1’ list designed to capture stocks with the potential for ‘significant positive price appreciation’.

United Utilities (UU.L) also rose, up 1% to 703p, after reporting that its annual profits would likely be ‘slightly higher’ this year.

Next (NXT.L) was the top riser on the FTSE 100, up 1.1% to 4,195p after reporting a 9% rise in 2012 pre-tax profits.

‘Great set of results from Next given the challenging environment showing the strength of its business model and how management’s relentless focus on marginal gains continues to pay off,’ commented Kate Calvert of Cantor Fitzgerald, who says the shares are a ‘hold’.

Among the losers, ENRC (ENRC.L) dropped 2.1% to 300p after Deutsche Bank cut its target price on the shares to 539p from 550p. The bank did however maintain its 'buy' rating on the shares.

The pound, which has zig-zagged this week, moved slightly higher as markets continued to consider the impact of Osborne’s plans to shake up British monetary policy. The chancellor swerved the more dramatic measure of changing the Bank of England's 2% inflation target, but announced measures that would give the Bank more flexibility.

See our FTSE data pages for more of the day's risers and fallers

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