St George Economics economy and finance update

Share Markets:

Both US and European markets fell in the wake of the bailout plans for Cyprus. While the economy of Cyprus is small, the nature of the bailout plan has unsettled investors.

In Europe the FTSE100 fell 0.5% and the DAX was down 0.4%. The Dow also fell 0.4%.


With equity markets on edge, demand for safe haven bonds was firmer. US government bond prices rose (yields fell) as did those in Germany and the UK. US 10 year government bond yields are back below 2.00% at 1.95%.

In Germany they yield 1.41% and in Australia 3.48%.

Foreign Exchange:

The AUD nudged back into USD 1.04 territory overnight as its solid fundamentals attracted buyers and as the US dollar index slipped on expectations the Cyprus bailout plan may be watered down.

The euro range traded against the AUD overnight with no clear direction.


Gold prices rose amidst the global financial uncertainty but copper prices were lower on fears the financial uncertainty will translate into weaker economic activity.

Oil edged higher on the hope that adjustments to the bailout package will avert further financial fallout.

The Eurozone finance ministers group took part in a teleconference early this morning to discuss changes to the bailout, which in turn may reduce the risk of contagion and capital flight.

As yet no outcomes have been announced.


New vehicle sales were unchanged in February, after falling 2.2% in January. Passenger vehicle sales fell 1.0% in February, after slumping 7.9% in January, while sports utility and 'other' vehicle sales strengthened further.

For the year to February, new vehicle sales are up 9.4%, a slowdown from the 10.9% annual pace in the year to January.


There has been uncertainty over the €17-18bn Cyprus bailout since it was sought in the middle of last year with the over-leveraged banking system needing rescue from huge (75% of loans) losses with mainly Greek bank counterparties, and the economy hit hard due to its close links with Greece.

The previous administration was at loggerheads with the EU about the amount and detail, but in late February the newly elected centre-right administration was keen to do a deal to end the uncertainty.

The EU Leaders' summit last weekend announced a €10bn bailout with the reminder funded by a 6.75%/9.9% levy on bank savings accounts (the higher rate to apply to accounts with €100k or more). This has caused uproar in Cyprus but sent reverberations throughout Europe - who could be next?

Cypriot banks are shut until Thursday and online banking has been disabled to prevent transfers to safe haven accounts but any run on Portuguese, Spanish and/or Italian banks would suggest contagion is affecting sentiment across peripheral Europe.

Why? Despite EU leader insistence it is a one-off solution for Cyprus, it casts uncertainty over the security of bank savings across Europe.

It is understood that the IMF wanted accounts with less than €100k exempt but the ECB, European Commission and Cypriot leadership calculated this was the only way to keep the levy under 10% and limit the EU contribution to avoid bailout fatigue in Germany and the other northern states backing the European Stability Mechanism (ESM) bailout fund.

The latest news is that the government may seek to bias the levy more to higher value accounts, many of which are believed to be held by wealthy Russians.

The deal still needs to be ratified by the Cypriot parliament (President Anastasiades' minority administration needs the support of minor parties; the Opposition Leader has already called the deal a betrayal; the vote has been delayed several times, most recently till Tuesday) and even the German Bundestag has a vote on its contribution to the €10bn EU share of the plan.

The Eurozone finance ministers group took part in a teleconference early this morning to discuss changes to the bailout, which in turn may reduce the risk of contagion and capital flight. As yet no outcomes have been announced.

United Kingdom: 

UK house prices rose 1.2% in the year to March according to the Rightmove index of asking prices, down from 2.4% in the year to January and 3.4% a year ago.

United States:

The US National Association of Home Builders' (NAHB) housing market index fell from 46 to 44 in March.

The almost uninterrupted recovery of the homebuilder confidence index from 14 in September 2011 to 47 in December 2012 has yet to see a rise yet this year, mainly due to present sales falling back and future sales and buyer traffic remaining closer to their recent highs.

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