Thursday, July 10, 2014

Markets sanguine over Cyprus uncertainty

March 20. 2013 11:39AM
Associated Press

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(AP) Markets took the uncertainty over Cyprus' bailout in their stride on Wednesday ahead of the latest policy statement from the Federal Reserve.

Though tensions remain over the financial future of Cyprus after its Parliament rejected a proposal to raid deposits, investors think some deal will be cobbled together soon, probably with Russia, to avoid the country's bankruptcy and possible exit from the euro.

"A deal with Russia is clearly seen as the best option in the markets, where investors are piling back into risk assets," said Craig Erlam, market analyst at Alpari.

In Europe, Germany's DAX was up 0.7 percent at 8,005 while the CAC-40 in France rose 1.2 percent to 3,821. The FTSE 100 index of leading British shares was flat at 6,439 after the government's annual budget kept tax and spend policy more or less unchanged.

In the U.S., the Dow Jones industrial average was up 0.5 percent at 14,531 while the broader S&P 500 index rose 0.6 percent to 1,558.

Trading over the rest of the day will likely continue to be dominated by developments relating to Cyprus as political leaders there try to work out a new way to raise 5.8 billion euros ($7.5 billion) in order to qualify for 10 billion euros worth of bailout funds from its euro partners and the International Monetary Fund. Much of the interest centers on Moscow, where the Cypriot finance minister Michalis Sarris is meeting his Russian counterpart.

Russia could play a role in any alternative rescue package. Russians are believed to account for just under a third of Cyprus' 68 billion-euro bank deposits and the two countries are longtime allies.

"We will be here until some kind of agreement is reached," Sarris said.

Cypriot markets remained closed alongside banks and there is growing speculation they won't reopen until next week. If Cyprus doesn't work out a way to get the money it needs, the banks could fail, fueling financial chaos that could eventually cause the country to leave the euro. That's a scenario European policymakers fought to avoid with other countries for fear that an exit by one may spell the eventual end of the currency.

Investors will also be monitoring the U.S. Federal Reserve, which ends a two-day policy meeting later Wednesday. The Fed is expected to keep borrowing costs at record low levels despite signs of a strengthening economy. The meeting will end with updated economic forecasts and a policy statement, with possible hints on the future of the Fed's stimulus program. Chairman Ben Bernanke will hold a news conference.

"Bernanke's press conference will be monitored for clues as to the Fed's eventual exit policy," said Neil MacKinnon, global macro strategist at VTB Capital.

What emerges could have a big bearing on the dollar, too. If there are hints that the monetary easing the Fed has conducted over the past few years is coming to an end, it may prompt a dollar surge, especially at a time when the euro is facing headwinds.

The euro managed to recover somewhat Wednesday, along with stocks, trading 0.8 percent higher at $1.2958. Earlier this week, the euro fell to its lowest level against the dollar in 2013.

Earlier in Asia, Hong Kong's Hang Seng rose 1 percent to 22,256.44 while South Korea's Kospi fell 1 percent to 1,959.41. Mainland Chinese shares rose on optimism about the economic outlook as concerns over recent property price curbs faded. The Shanghai Composite Index surged 2.8 percent to 2,317.37, the biggest gain in more than two months, while the smaller Shenzhen Composite Index added 2.7 percent to 949.82.

Stock markets in Japan were closed for a public holiday.

Oil prices advanced alongside equities, with the benchmark New York rate up 60 cents at $93.12 a barrel.

Associated Press

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