MONDAY SCOUTING REPORT: A Tiny Country Is Holding The World Hostage
Now Cyprus, an island country whose economy is a fraction of the size of Greece's, now threatens to stoke the euro crisis that has been dormant in recent months.
This comes as the U.S. prepares for a slew of housing data and a monetary policy announcement from the federal reserve.
Top Stories
- Cyprus Bank Depositors To Get Whacked By Instant Tax. On Saturday, EU leaders and the IMF announced a 10 billion euro bailout deal for Cyprus that would involve an unexpected levy on Cypriot bank depositors on Tuesday. Specifically, anyone with more than 100,000 euros deposited would immediately get hit with a 9.9 percent charge. Anyone with less than that would get hit with a 6.75 percent charge. This sent depositors running to ATMs to drain their accounts. In addition to Cypriot mom and pops, Russian oligarchs, mobsters, and money launderers are also expected to take a hit.
- Bad Precedent. The expert response to the Cypriot bank levies has been overwhelmingly negative. The Economist has deemed it "unfair, short-sighted, and self-defeating." Societe Generale's Sebastien Galy wrote, "It breaks a cardinal rule, namely public trust on which money relies." JP Morgan's Alex White believes Europe may have just "bazookaed itself in the foot." Morgan Stanley's Joachim Fels wrote, "I view this as a worrying precedent with potentially systemic consequences if depositors in other periphery countries fear a similar treatment in the future." Ultimately, the market isn't worried about Cyprus. Rather, they're worried that regulators may impose similar levies on deposits in other countries.
- Washington Is Crushing Confidence. U.S. economic data has been coming in surprisingly strong in recent weeks. Employment is improving, consumers are spending, manufacturing is increasing, and housing continues its rebound. Despite all of this, confidence is lagging. "Never before in the long history of the surveys have so many consumers spontaneously mentioned that the disarray in federal economic policy was the main problem facing the economy," wrote the University of Michigan when it reported a stunning drop in its proprietary consumer confidence report.
Economic Calendar
- Housing (all week): We'll get lots of housing data this week, and everyone expects all of it to confirm the ongoing U.S. housing recovery. The NAHB homebuilder will be released on Monday, February housing starts will be released on Tuesday, and February existing home sales will be released on Thursday. "Housing data will be a particular focus, and we forecast increases in builders’ confidence, starts, existing home sales, and the FHFA home price index," writes UBS's U.S. economics team.
- FOMC Announcement, Forecasts, Press Briefing (Wednesday): The Fed will be holding its Federal Open Market Committee meeting this week where they will update us on monetary policy. Economists don't expect any language that would suggest any major changes in the current easy monetary policy. From High Frequency Economics' Jim O'Sullivan: "They will likely note the better-than-expected data recently but probably still emphasize that the unemployment rate is “elevated,” make no change to the asset purchase program—QE3—and once again stress that “a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens,"
Market Update
The S&P 500 closed last week just five points from its all-time high. "Much of the market’s recent gains have come from multiple expansion rather than higher earnings expectations," writes Morgan Stanley's Adam Parker in a note published Sunday night. "Most likely, this reflects central banks’ aggressive liquidity injections, which have translated into an increasing conviction among investors that major tail risks have been indefinitely removed. The growing reality that there are limited investment opportunities outside of equities has fueled stronger inflows into equity markets in some regions and driven expectations of an even more substantial rotation."
In the note, Parker raised his year-end target for the S&P 500 to 1,600 from 1,434.
Much of the improving economic data has been driven by the end of private sector deleveraging, which Citigroup's Peter Orszag describes as the most important trend in the economy right now.
Watch Orszag discuss this here: