Cyprus closes in, on EU bailout U-turn on levy

In Finland, an ally of Germany in disciplining euro zone partners, European affairs minister Alexander Stubb told Reuters he was confident Cyprus would accept EU rescue terms "because there are no other options".
Cyprus is expected to make a dramatic U-turn on Saturday to avert the imminent threat of financial meltdown, having signaled it is willing to tax big savers in its stricken banks to clinch a bailout from the European Union.

The island's partners in the 17-nation euro zone scheduled a meeting for Sunday in Brussels, in a strong sign they believe a solution is near.

 

As hundreds of demonstrators faced off with riot police outside parliament late into Friday night, lawmakers inside voted to nationalize pension funds, pool state assets for a bond issue and peel good assets from bad in stricken banks.

Officials said a deal was imminent to raise 5.8 billion euros demanded by the EU in return for a 10 billion euro ($13.00 billion) lifeline, including some kind of levy on bank deposits, which could be voted on as soon as Saturday.

Without a deal by Monday, the European Central Bank has threatened to cut off cash for Cypriot banks, spelling certain collapse and possible ejection from the euro.
Cyprus moved perilously close to bankruptcy when its parliament threw out the proposed levy on Tuesday, with Cypriots enraged by plans to hit small holdings of ordinary savers as well as large accounts, many held by foreign investors.

In the absence of the bank levy, Nicosia turned to Russia, whose citizens have billions of euros at stake in Cyprus's outsized banking sector. But Finance Minister Michael Sarris returned from Moscow empty-handed. On Friday he said the bank levy was back "on the table".
Party officials told Reuters that discussions were centered on a levy on depositors holding over 100,000 euros, sparing smaller savers. One official said the tax could be limited to big savers at the island's biggest lender, Bank of Cyprus, at a 20 percent rate.

Lawmakers adopted a bill that would pave the way for the government to split its failing lenders into good and bad banks. The measure is likely to target Bank of Cyprus and No. 2 lender Cyprus Popular Bank, also known as Laiki, and would make it easier for the government to safeguard deposits that enjoy a state guarantee of up to 100,000 euros.
"With the process of consolidation, the depositors over 100,000 euros will wait for several years to see how much of their deposits they will collect," said Averof Neophytou, deputy leader of the ruling Democratic Rally party.

"At the same time, this political decision to support this harsh law safeguards 100 percent of the deposits of 361,000 depositors in Laiki Bank," he added, referring to depositors with up to 100,000 euros.

The pace of the unfolding drama has stunned Cypriots, who barely a month ago elected conservative President Nicos Anastasiades on a mandate to secure a bailout.
But lawmakers balked at hitting small savers with the bank levy, a rejection of the kind of strict austerity signed up to by Portugal, Ireland, Greece, Spain and Italy over the last three years of Europe's debt crisis.

Germany warned Cyprus it was "playing with fire". Moody's downgraded its credit rating on deposits in Cypriot banks to Caa3, just two rungs from the bottom on its 11-grade scale of junk debt.
The EU says the only way to find the 5.8 billion euros Cyprus needs to contribute to the bailout of its banks is from the depositors who put money in them.

The tottering banks hold 68 billion euros in deposits, including 38 billion in accounts of more than 100,000 euros - enormous sums for an island of 1.1 million people which could never sustain such a big financial system on its own. Much of the banks' capital was wiped out by investments in Greece.
Many of the biggest depositors are foreigners, including rich Russians, and European politicians are loathe to spend taxpayers' money on a bailout if the depositors take no losses.

"EDGE OF AN ABYSS"
With banks in Cyprus closed until Tuesday, Cypriots have been besieging bank cash machines all week. Faced with an almost certain run on banks when they reopen, parliament also gave the government the power to impose capital controls.

"Our so-called friends and partners sold us out," said Marios Panayides, 65, a protester at the parliament. "They have completely abandoned us on the edge of an abyss."
Retailers, facing cash-on-delivery demands from suppliers, warned stocks were running low.
"At the moment, supplies will last another two or three days," said Adamos Hadijadamou, head of Cyprus's Association of Supermarkets. "We'll have a problem if this is not resolved by next week."
The Bank of Cyprus urged the government to go back and cut a deal with the EU under which larger deposits over 100,000 euros would be taxed. It was preferable, it said, to a collapse of the system and ejection from the euro which would wipe out assets.
"There must be no further delay," the bank said.

Taking a first step toward financial consolidation, Cyprus arranged on Friday for the takeover of big Greek units of its two biggest banks by a Greek competitor.
EU officials criticize Cyprus for initially insisting any deposit levy should hit even small savers. Cypriot leaders did not want to shift the whole burden to bigger depositors in the apparent hope of saving Cyprus's offshore banking industry.

German Chancellor Angela Merkel told lawmakers that while she wanted to keep Cyprus in the euro zone, it must first recognize it had no future as an offshore financial center, two parliamentarians told Reuters.

Her finance minister, Wolfgang Schaeuble, said that muted reactions to the crisis in financial markets showed the euro zone was able to contain the Cyprus problem.
The Dutch head of the euro zone finance ministers' group, Jeroen Dijsselbloem, said the group wanted to keep Cyprus in the currency union. But when asked, he did not rule out an exit.
"All kinds of scenarios are possible and the scenarios we're focusing on are to come to a joint solution in which Cyprus is saved but in which the banking sector continues in a smaller but healthier form."

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China May Limit Gold to 2% of Foreign Reserves,

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China is likely to limit its gold holdings to 2 percent of its total foreign exchange reserves, said Yi Gang, a deputy Chinese central bank governor.

The People’s Bank of China last made known changes to its gold reserves in 2009, announcing that it held 1,054 metric tons. The bank hasn’t made any revisions since then. That’s about 1.8 percent of its total reserves, according to data from the World Gold Council.

“If the Chinese government were to buy too much gold, gold prices would surge, a scenario that will hurt Chinese consumers,” Yi said today in a press briefing in Beijing. “We can only invest about 1-2 percent of the foreign exchange reserves into gold because the market is too small.”
The nation’s reserves, which have surged more than 700 percent since 2004, surpassed the value of all official bullion holdings in January 2004 and rose to $3.3 trillion at the end of 2012, data compiled by Bloomberg show.

Gold has fallen about 4.7 percent this year as the U.S. stocks extended a record rally amid speculation that the FederalReserve may rein in stimulus as the recovery gains traction, curbing demand for safe-haven assets.

China was expected to displace India as the biggest gold consumer last year, according to forecast in November from the producer-funded World Gold Council. Chinese investors sought to protect their wealth by buying gold, after government measures to curb real estate prices and as China’s stock market has fallen in the past decade even though nominal gross domestic product rose fourfold.

Foreign Reserves

About two-thirds of China’s foreign reserves are dollar- denominated and another quarter is in euros, according to Yao Wei, a Hong Kong-based economist at Societe Generale SA. China is now encouraging companies and residents to keep more foreign currency in a strategy known as “hiding foreign currencies among people,” meaning that the government’s foreign reserves may “gradually fall,” Yang said.

Gold capped a 12th annual advance in 2012 and rose to a record of $1,921.15 an ounce in 2011. Gold for immediate delivery were little changed today at $1,591.95 at 6:29 p.m. Beijing time.
“We will always keep gold in mind as an option in reserve assets and investments,” Yi said. “We are able to import 500-600 tons a year, or more, but we will also take into consideration a stable gold market.”

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Wall Street rally pauses on global headwinds

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Wall Street was little changed on Monday as Italy's credit downgrade and disappointing Chinese economic data gave investors a reason to pause after last week's rally that took the Dow to record highs.
Even with the slight decline, the S&P 500 index .SPX was only about 1 percent away from its all-time closing high. U.S. stocks have seen a strong gain in the first three months of the year and pullbacks have been short lived as investors look for an opportunity to buy.
"There's a lot of pent-up demand and people seem to be buying on weakness," said Alan Lancz, president of Alan B. Lancz & Associates Inc in Toledo, Ohio.
"I don't see this as anything negative from the standpoint of what the market's done throughout 2013 so far."

The S&P is up 8.7 percent since the beginning of the year, while the Dow has climbed nearly 10 percent. Markets have been cheered by signs of improvement in the U.S. economic recovery, including recent unexpected strength in the labor market.

But a number of potential roadblocks are not far from investors' minds, including worries about the euro zone debt crisis after Fitch downgraded Italy due to the country's political stalemate.
Data over the weekend from China pointed to an uneven recovery for the world's second-largest economy as inflation rose to a 10-month high in February and factory output and consumer spending were weaker than forecast.

The Dow Jones industrial average .DJI edged down 1.95 points, or 0.01 percent, at 14,395.12. The Standard & Poor's 500 Index .SPX slipped 1.89 points, or 0.12 percent, to 1,549.29. The Nasdaq Composite Index .IXIC was off 9.56 points, or 0.29 percent, to 3,234.81.

Dell Inc (DELL.O) has agreed to give Carl Icahn a closer look at its books less than a week after the activist investor joined a growing chorus of opposition to founder Michael Dell's plan to take the world's No. 3 personal computer maker private. Dell shares were up 1.1 percent at $14.31, above the take-private offer price of $13.65.

Genworth Financial Inc (GNW.N) shares jumped 6.4 percent to $10.46 following a report by Barron's that the mortgage insurer's stock could almost double in the next year, boosted by gains in mortgage and healthcare pricing.

Dick's Sporting Goods Inc (DKS.N) slumped 7.9 percent to $46.61 after the retailer reported lower-than-expected fourth-quarter results and gave a disappointing forecast.

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George Soros's new stock picks.

The billionaire investor initiated a position of 4.1 million shares in Morgan Stanley MS -0.31% during the fourth quarter. Morgan Stanley has been struggling with profitability in recent quarters, and severely underperformed expectations at times. Fellow billionaire Dan Loeb's Third Point was also buying Morgan Stanley last quarter, reporting a position of 7.8 million shares after not owning any of the stock at the end of September (find more stocks Loeb was buying). Wall Street analysts insist that the investment bank is a good value, with their expectations implying a forward P/E of 9 and a five-year PEG ratio of 0.6.
 

Citrix Systems CTXS +0.52% , a $13 billion market cap business software and services company, was another of Soros's new stock picks. Lee Ainslie's Maverick Capital increased its own stake in Citrix in the fourth quarter of 2012, to a total of 3.8 million shares. Citrix experienced a 20% increase in revenue last quarter compared with the same period in the previous year, but slimmer margins resulted in net income only rising 5%. With the stock priced for growth at a trailing earnings multiple of 38, performance would have to improve in order for it to be a worthwhile growth stock.

Soros also liked Anadarko Petroleum APC -0.30% , buying up almost 760,000 shares of the oil and gas company. 62 filers in our database reported a position in Anadarko, which made it the most popular energy stock among hedge funds (see more energy stocks hedge funds loved). Anadarko's earnings multiples are in the teens- the trailing and forward P/Es are 17 and 15 respectively- but that represents a premium to the major oil companies and the company's revenue has actually been down. It might be worth looking at on the basis of its popularity but we aren't particularly excited about the stock.
 

The 13F disclosed a new position of about 950,000 shares in Plains Exploration & Production PXP -0.29% . The oil and gas company is an acquisition target as Freeport-McMoRan Copper & Gold FCX -0.88% plans to buy it and a related company. Many investors like to invest in merger arbitrage investments because the returns are uncorrelated with the stock market, though there are of course risks (read more about merger arbitrage strategies). Plains itself had expanded from natural gas to offshore oil assets earlier in 2012.

Ford F +0.63% rounded out the five largest new positions that Soros reported owning at 3.1 million shares. Ford's revenue edged up in the fourth quarter of 2012 versus a year earlier, and many value investors have been bullish on autos for several months. The market in general is quite pessimistic about Ford, as it trades at 9 times trailing earnings. The sell-side generally expects improvements on the bottom line with the result being that the five-year PEG ratio is a bit below 1. Appaloosa Management, managed by billionaire David Tepper, had over 11 million shares of Ford in its own portfolio at the beginning of January

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Business spending plans gauge hits 13-month high

A gauge of planned U.S. business spending recorded its largest increase in more than a year in January, suggesting growing confidence in the durability of the economic recovery.

The case for the economy's resilience was further bolstered by another report on Wednesday showing that contracts to buy previously owned homes approached a near three-year high last month. Housing is expected to underpin growth this year.

Non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, jumped 6.3 percent, the biggest gain since December 2011. These so-called core capital goods orders had slipped 0.3 percent in December.

"The encouraging tone of this report suggests that the business sector is beginning to feel sufficiently confident about the improving economic outlook to commit to investment activity," said Millan Mulraine, a senior economist at TD Securities in New York.

In a separate report, the National Association of Realtors said its pending home sales index increased 4.5 percent to its highest since April 2010, just before a home-buyer tax credit expired.

The rise in signed purchase contracts, which become sales after a month or two, added to data such as building permits and house prices that have suggested a decisive turnaround in the housing market.
Home building added to growth last year for the first time since 2005 and economists expect another contribution this year.

Still, the reports are unlikely to change the Federal Reserve's very easy monetary policy stance. Fed Chairman Ben Bernanke, testifying before Congress for a second straight day, pointed to the pick-up in housing as a sign the U.S. central bank's aggressive easing of monetary policy is gaining traction.
However, he signaled a willingness to press forward with efforts to spur an even stronger recovery and lower the jobless rate, which remains at a lofty 7.9 percent.

Stocks on Wall Street ended more than 1 percent higher on the data and Bernanke's comments, with the Standard & Poor's 500 posting its best daily percentage gain since January 2. The U.S. dollar weakened against a basket of currencies, while prices for U.S. government debt fell.

FACTORY ACTIVITY COOLING

Although shipments of core capital goods, used to calculate equipment and software spending in the government's measures of gross domestic product, fell last month, economists were little worried.
"The balance between orders and shipments of capital goods is looking healthier as backlogs of core capital goods orders rose for the first time in eight months," said John Ryding, chief economist at RDQ Economics in New York.

"Our take is that manufacturing activity - especially in the capital goods area - is bouncing back after cautious behavior ahead of the fiscal cliff."

U.S. factory activity, which helped lift the economy from recession, has cooled in recent months, held back by sluggish domestic demand, tighter fiscal policy in Washington and slowing global growth.
While business investment plans looked strong, the report showed that overall orders for durable goods - items ranging from toasters to aircraft that are meant to last three years or more - tumbled 5.2 percent as demand for civilian and defense aircraft collapsed. It was the first drop since August.
Orders for civilian aircraft, which are very volatile and which tend to fall at the start of the year, dived 34 percent.

Boeing received orders for only 2 aircraft, down from 183 in December. Economists said the decline was probably not related to the grounding of Boeing's 787 Dreamliners after problems with overheating batteries.

"I haven't heard any reports about airlines canceling their orders. This could be a one-month lull rather than something greater," said Stephen Stanley, chief economist at Pierpont Securities in Stamford, Connecticut.

Defense aircraft orders plunged 63.8 percent after soaring 58.5 percent in December, likely as orders were pushed forward ahead of $85 billion in government-wide spending cuts set to kick in on Friday.
Overall defense capital goods orders plummeted 69.5 percent in January, the sharpest fall since July 2000.

But durable goods orders excluding transportation increased 1.9 percent last month, also the largest gain since December 2011, after increasing 1 percent in December. That was a sign factory activity continues to plod along.

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Gold Rallies Sharply on Bernanke's Dovish Stance, Bargain Hunting, Short Covering, Safe-Haven Demand

Gold futures prices ended the U.S. day session with sharp gains Tuesday and pushed well above the key $1,600.00 level. The yellow metal was boosted in part by Federal Reserve Chairman Ben Bernanke assuaging market place fears that the U.S. central bank could exit its very easy-money ways sooner rather than later. Safe-haven buying was also seen in gold Tuesday, amid fresh concerns about the sovereign debt crisis in the European Union. Short covering and bargain hunting were also featured in both gold and silver, following last week’s strong selling pressure. April Comex gold last traded up $29.80 at $1,616.40 an ounce. Spot gold was last quoted up $23.10 at $1,617.25.  May Comex silver last traded up $0.383 at $29.43 an ounce.

After seeing modest early price gains, gold futures prices took a dip at mid-morning Tuesday when some stronger-than-expected U.S. economic data was released. U.S. home sales rose sharply in January, while the consumer confidence index rose in February. The latest Richmond Fed business survey also showed an upbeat reading. Bernanke’s prepared text for delivery to the U.S. Senate was also released at the same time the U.S. economic data came out. It took gold traders and investors a bit to digest Bernanke’s remarks, but the gold market did start to rally sharply in the aftermath of his comments. While Bernanke's remarks were pretty much what the market place expected, they were nonetheless dovish on U.S. monetary policy, and what the precious metals market bulls wanted to hear from the Fed chief. He said the benefits of a very accommodative monetary policy outweigh the potential risks of such, helping calm worries the U.S. central bank could end its quantitative easing of monetary policy sooner rather than later. In questioning from senators, Bernanke also hinted the Fed may not have to sell off all its asset purchases over a period of time and may just keep them until they expire. That was a bit of bullish surprise for the raw commodity and stock markets, as there was some worry that the Fed selling off those assets, even over time, could put some downside pressure on many markets.

The European Union and its sovereign debt problems are back on the front burner of the market place after a few months’ hiatus. Italian elections that just concluded and failed to show a clear winner indicated voters ostensibly rebuked present government austerity measures meant to repair Italy’s damaged economic and financial structure. It also suggests political instability in Italy in the coming months. The Italian vote left the market place wondering when the next shoe will fall in the EU debt crisis that remains a serious matter in the world market place. Flight-to-safety buying of U.S. Treasuries, German bunds, gold and the U.S. dollar all quickly came back into vogue. Risk assets such as world stock markets and many commodity markets, and the Euro currency, were pressured on the Italian vote news. Other than the safe-haven German bunds, European bond yields were on the rise as fears of an EU debt contagion are again surfacing. There are Italian government debt auctions Tuesday and Wednesday that will be very closely scrutinized by the market place.

The U.S. government’s likely inability to agree on a taxing and spending plan by the March 1 sequestration deadline has added to a nervous and uncertain atmosphere in the world market place this week.

In Asia, the Japanese stock market fell as the yen rallied on safe-haven investor demand due to the resurfacing of the EU debt crisis. The yen had been on a steady decline for the past four months, but made an abrupt about-face on Monday afternoon.

The U.S. dollar index was higher again Tuesday and hit a fresh six-month high. The U.S. dollar bulls have gained upside technical momentum recently to suggest the dollar index has put in a market bottom and can continue to trend higher in the near term. Meantime, Nymex crude oil futures prices were lower Tuesday and hit a fresh two-month low. The crude oil bears have gained fresh downside near-term technical momentum recently. These two key “outside markets” were in a bearish posture for the precious metals Tuesday, but traders and investors chose to buy the recent dip in gold prices anyway.

The London P.M. gold fixing is $1,590.50 versus the previous London P.M. fixing of $1,586.25.
Technically, April gold futures prices closed nearer the session high Tuesday. Recent serious chart damage is starting to be repaired but the bulls have more heavy lifting to do in the near term to suggest a price uptrend can be sustained. Gold prices are still in a six-week-old downtrend on the daily bar chart. The gold bulls’ next upside near-term price breakout objective is to produce a close above solid technical resistance at $1,650.00. Bears' next near-term downside breakout price objective is closing prices below solid technical support at the February low of $1,554.40. First resistance is seen at Tuesday’s high of $1,619.70 and then at the January low of $1,627.90. First support is seen at $1,600.00 and then at $1,590.00. Wyckoff’s Market Rating: 4.0

May silver futures prices closed near the session high Tuesday and saw more short covering and bargain hunting following recent strong selling pressure. Serious near-term technical damage has been inflicted in silver recently. May silver bears have the near-term technical advantage. Prices are in a six-week-old downtrend on the daily bar chart. Bulls’ next upside price breakout objective is closing prices above solid technical resistance at $30.00 an ounce. The next downside price breakout objective for the bears is closing prices below solid technical support at the February low of $28.315. First resistance is seen at Tuesday’s high of $29.495 and then at $29.67. Next support is seen at $29.00 and then at this week’s low of $28.60. Wyckoff's Market Rating: 3.5.

May N.Y. copper closed up 235 points at 358.45 cents Tuesday. Prices closed nearer the session high on short covering after hitting a fresh three-month low early on. Serious near-term chart damage was inflicted last week. Copper bears have the overall near-term technical advantage. Copper bulls' next upside breakout objective is pushing and closing prices above solid technical resistance at 365.00 cents. The next downside price breakout objective for the bears is closing prices below solid technical support at 350.00 cents. First resistance is seen at 360.00 cents and then at 362.50 cents. First support is seen at 355.00 cents and then at Tuesday’s low of 353.35 cents. Wyckoff's Market Rating: 4.0.

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