Cyprus Brings Relief, but Is It All For Naught?
Cyprus: the good and the bad news.
The good news: a deal is reached that imposes no broad tax on depositors, no losses by depositors with up to 100,000 euros. Instead, it does force a bank restructuring, with Laiki Bank essentially being split into a "good bank" (depositors under 100,000 transferred to Bank of Cyprus) and a "bad bank." Most Laiki bondholders will be wiped out, with uninsured depositors losing between 30 and 70 percent.
Bad news: We have a country that will be in an economic tailspin and require more, not less, assistance from the European Central Bank. We have capital controls on a European country. We have the sight of a chaotic negotiating process, led by the EU which insisted that depositor money be part of the solution, which occurred with no due process.
We have a deal that does not even require the approval of the Cyprian Parliament, since legislation was passed on Friday. How weird is that? The deal will require approval from the parliaments of several countries, including Germany, but not of the one country most affected.
Yet more importantly, senior bondholders in Laiki will be wiped out. What does that say about the rest of bank bondholders in Europe?
The concept of a banking union has been greatly damaged. It's going to be hard for Europeans to convince everyone that bank deposits are safe. You can argue that Cyprus is a "special case" but depositors in southern Europe are unlikely to view it that way.
Will deposits shift out of Europe, into the U.S.? Or perhaps to the U.K.?
And will the ECB get even more aggressive, just to assuage lingering concerns? The ECB meeting is next week (April 4). Will there be more announcements of additional "liquidity" provided to banks, just as a precaution?
1) Regardless of the precedent, most traders believe the Cyprus deal removes an element of volatility. This is fine for the bulls: they want the focus on strong corporate balance sheets,reasonable valuations, and accomodative central banks.
But there are two problems:
a) Earnings, guidance, and sales commentary out of several companies last week (Oracle, Caterpillar, TIBCO Software,Federal Express) was surprisingly weak, a major problem considering no one is lowering fairly high earnings estimates gains (about 10 percent) for the S&P 500 in 2013;
b) Seasonality is in full effect. The 'Sell in May And Go Away' dynamic has a powerful following on Wall Street, mainly because it has a terrific record. April is usually fine, but May gets rocky.
2) While everyone is lamenting a lack of topline growth, take a look at Dollar General, which released sales growth estimates for 2013 that would be the envy of any company. Total sales increase of 10 to 12 percent, same-store sales growth of four to six percent. Earnings guidance good as well, which sent the stock up four percent.
3) Welcome, ICE futures traders! ICE futures traders are logging their first day on the NYSE floor today...about 40 traders and staff have moved to the NYSE floor from the ICE Futures trading floor (formerly the New York Board of Trade, or NYBOT, down the street). They will be trading coffee, cocoa, cotton, orange juice, and sugar futures. These are all-electronic traders: there is no open outcry anymore. ICE bought the NYBOT in 2007, and this move is not contingent on the NYSE and ICE completing their merger.
—By CNBC's Bob Pisani