The euro weakened to its lowest level this year, while stocks and commodities slumped, as an unprecedented levy on Cyprus’s bank savings threatened to throw Europe back into crisis. German two-year note yields dropped below zero as Spanish and Italian borrowing costs jumped.
The 17-nation shared currency sank 1.2% to $1.2926 at 9:30 a.m. in New York. The MSCI All-Country World Index lost 1.2%, retreating from the highest level since June 2008. The Stoxx Europe 600 Index slid 0.7% and the Standard & Poor’s 500 Index dropped 0.5%. Copper tumbled more than 2% and gold rose 1.1%. Germany’s note yields fell to as low as minus 0.003%. Spain’s 10-year rate climbed six basis points to 4.98% and the yield on similar-maturity Portuguese bonds rose 13 basis points to 6.08%.
Finance ministers in the euro area reached an agreement on March 16 forcing depositors in Cypriot banks to share in the cost of the latest bailout. Bank creditworthiness deteriorated the most since inconclusive Italian elections three weeks ago as Moody’s Investors Service said today the Cypriot levy is negative for bank depositors across Europe. Bill Gross at Pacific Investment Management Co. said it moves “risk-on” trades to the back seat.
“This creates a precedent and is a bit scary,” said Matthieu Giuliani, who helps oversee $5.3 billion as a fund manager at Banque Palatine SA in Paris. “It hurts the market. But this is case specific to Cyprus. I don’t see Germany or the EU imposing such a thing on Spain or Italy. It would create panic in the banking system.”
Cypriot Vote
Cypriot lawmakers will meet tomorrow to ratify a levy to raise 5.8 billion euros ($7.6 billion) as part of a bailout aimed at preventing a financial collapse and a possible exit from the euro area. The meeting was delayed from today due to the need to examine changes to legislation, Speaker Yiannakis Omirou told reporters in Nicosia, in comments broadcast on state-run CYBC.
The euro slid as much as 1.5% against the dollar to $1.2882, its weakest level since Dec. 10, before paring its decline. It was 1.3% lower against the yen as Japan’s currency strengthened against all its 16 major peers.
The additional yield investors demand to hold Spain’s 10- year securities instead of benchmark German bunds widened 12 basis points to 359 basis points. Portugal’s 10-year yield spread to similar-maturity bunds widened to as much as 486 basis points today, the most in two weeks.
Systemic Risk
“The approach of applying haircuts to bank deposits in the Cypriot bailout is driving credit spreads substantially wider,” Greg Venizelos, a fixed-income strategist at BNP Paribas SA in London, wrote today in a report. “Systemic risk has risen as the market contemplates the read-through of breaching the sanctity of deposits.”
While the rate on Portuguese debt due October 2023 rose as much as 30 basis points to 6.25%, that’s only the biggest increase since Feb. 26, when it climbed 48 basis points after the Italian election failed to produce a clear winner. Spanish yields rose 20 basis points on Feb. 26. The yield on Italy’s 10- year bonds added four basis points today, compared with a 41 basis-point jump three weeks ago.
“So far it seems like it’s fairly calm and if it can stay that way that’s good,” said Allan von Mehren, chief analyst at Danske Bank A/S in Copenhagen. “The markets are not too scared. It is a big deal but everything depends on what happens within the next couple of days. If we get a deal then it should calm down very swiftly. That’s what I think is going to happen.”
The yield on U.S. 10-year Treasuries slid five basis points to 1.94%. Japan’s 10-year bond yield fell three basis points to 0.596%.
Default Risk
The cost of insuring against default by banks rose the most since Feb. 26, with the Markit iTraxx Financial Index of credit- default swaps on 25 banks and insurers jumping 14 basis points. Italian and Spanish lenders were the worst performers.
“More contagion fears will spread through investors and it will encourage depositors in the European periphery to move their funds to a safer place, either under the pillow or to Germany,” said Mark Bayley, a Sydney-based credit strategist with advisory company Aquasia Ltd. “This is essentially a bail- in of depositors and sets a dangerous precedent.”
The Stoxx 600 declined for a second day as banks and insurers led losses. UniCredit SpA, Italy’s biggest bank, France’s Societe Generale SA and Spain’s Banco Bilbao Vizcaya Argentaria SA dropped more than 4%. Marks & Spencer Group Plc, the U.K.’s largest clothing retailer, rallied 8% in London trading after the Sunday Times reported that the Qatar Investment Authority is considering an 8 billion-pound ($12 billion) takeover.
Gold Rallies
The S&P 500 declined for a second day after rising to within two points of its 2007 record last week. Citigroup Inc. and Bank of America Corp. paced losses in financial shares. Transocean Ltd. slipped in pre-market trading after the offshore-rig contractor said its board opposes the dividend and director nominees proposed by its biggest shareholder, Carl Icahn.
The S&P GSCI gauge of 24 commodities dropped 1.1%, the biggest decline since Feb. 21. Copper fell as much as 2.7% to $7,545.75 a metric ton, the lowest price since Aug. 20 and biggest decline since June 21. Gold rose as much as 1.1% to $1,609.40 an ounce, the highest since Feb. 27. West Texas Intermediate oil dropped 1.4% to $92.14 a barrel.
The MSCI Emerging Markets Index fell 1.4% to the lowest this year. Russia’s Micex Index tumbled the most in five months, dropping 2.7% with trading volume 93% higher than the 30-day average. Moody’s said Russian corporate deposits in Cyprus may total $19 billion.
The ruble weakened 0.9% against the dollar. Hungary’s forint declined 0.6% to a 14-month low versus the euro.
The Hang Seng China Enterprises Index tumbled 2.1%, extending declines from this year’s peak to 12% as slowing growth and accelerating inflation spurred JPMorgan Chase & Co. to downgrade the nation’s shares to underweight. Benchmark gauges in Taiwan, the Philippines, Poland and South Korea fell at least 0.9%.
