Tiny Cyprus is getting a lot of airtime today as the
Mediterranean island nation's bailout has brought back the
festering Euro-zone issue to the front. But I seriously doubt if
it's about Cyprus or the Euro-zone. We have had some really
impressive gains in the market and investors seem to be using
Cyprus as an excuse to prudently cash out some of those gains.
After all, hardly anyone expects this week's Fed meeting to
provide any tangible signal about the course of their policy. And
there is not much on the data docket other this week other than
the Fed meeting.
The Cyprus bailout breaks new ground by forcing pain on bank
depositors. But this is essentially a reflection of Cyprus's
unique bank depositor base (a lot of Russian money is parked
there) and not a new template that would be relevant to the likes
of Spain and Italy. No German politician would like to be accused
of using tax-payer money to bailout (shady) Russian depositors.
Outside of Switzerland, no such issues exist, particularly in
Spain and/or Italy. As such, the odds of fresh financial market
contagion as a result of the Cyprus issue are very low.
The Fed's official post-meeting statement is unlikely to point
towards a change in policy, though one would expect some
acknowledgement of the recent flow of positive economic data. If
not in the official statement, then the accompanying forecasts
would indicate how the Fed officials view the interplay of recent
positive data and the potential drag from fiscal austerity.
Economic data has been turning up lately, prompting many to raise
their forecasts for the current quarter.
But we have seen such favorable momentum at the start of the
year lose ground in the Spring/Summer months in each of the last
three years. May be 'this time is different' given the housing
situation and stabilized European backdrop (Cyprus
notwithstanding). Hard to know at this stage whether the ongoing
improving trend will prove more enduring this time around or not,
but it is no doubt reasonable to be a bit skeptical of blindly
extrapolating recent data into the coming quarters. What all this
means is that the Fed's QE program is here to stay, at least for
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