GLOBAL MARKETS-Shares, euro fall on continued Cyprus concerns

Tue Mar 19, 2013 1:15pm EDT

* European shares fall with Cyprus still a concern
    * Data latest sign of U.S. housing strength
    * German government bonds rise, periphery bonds dip


    By Ryan Vlastelica
    NEW YORK, March 19 (Reuters) - Global stock markets fell on
Tuesday, extending the previous day's decline as investors
continued to fret about a bail-out plan for Cyprus and the
possible effect on the euro zone should it collapse.
    Markets have been volatile, with U.S. stocks opening lower
and then briefly rebounding as investors used strong housing
data as an opportunity to pick up beaten down shares. In midday
trading, however, shares returned to negative territory.
    European stocks, along with the euro and oil, had been
pressured on concerns over the risk of failure for a bailout
deal aimed at saving Cyprus from default and its banks from
collapse. 
    A government spokesman said Cyprus' parliament was likely to
reject plans agreed by euro zone officials over the weekend to
part-fund a 10 billion euro rescue of the island by seizing
between 6.75 percent and 9.9 percent of deposits in Cypriot
banks. 
    "This could be a flash in the pan but it is a reminder to
investors that the situation in Europe is not resolved. It could
be the start of a spring correction just as we saw in 2011 and
2012," Andrew Milligan, global head of strategy for Standard
Life Investments in Edinburgh, said in a note.
    Euro zone ministers have urged Cyprus to let smaller savers
escape the levy, but if parliament cannot agree, it would put
the bailout in jeopardy and raise the risk of default.
 
    The euro fell and hit a session low against the
dollar, while European shares closed 0.4 percent lower.
London's FTSE 100 slipped 0.3 percent and Paris's CAC-40
 fell 1.3 percent while Frankfurt's DAX fell 0.8
percent. MSCI's measure of global stock markets 
was off 0.5 percent.
    In the United States, the Dow Jones industrial average
 was down 44.62 points, or 0.31 percent, at 14,407.44. The
Standard & Poor's 500 Index was down 9.21 points, or 0.59
percent, at 1,542.89. The Nasdaq Composite Index was
down 19.66 points, or 0.61 percent, at 3,217.93
    The early gains in U.S. stocks came on data showing that
groundbreaking for new homes climbed in February, a sign the
nation's housing market recovery was gathering steam.
 
    According to the latest Reuters poll of analysts, the S&P
500 is expected soon to hit a record high, though the blistering
rise in equities so far in 2013 is unlikely to last.
 
 

    BUND BOUNCE
    The plan to seize deposits in Cyprus shredded confidence in
the 100,000 euro ($129,600) guarantee on savings offered across
the European Union and raised fears of bank runs in other
debt-strained countries, putting safe-haven German government
bonds again in demand.
    The Bund future built gains steadily through the
morning before solid ZEW data tempered some of the demand,
leaving it up 0.5 percent at 144.67. The benchmark 10-year U.S.
Treasury note was up 16/32, the yield at 1.8991
percent. 
    "We are just waiting for another headline out of Cyprus,"
one trader said, adding that buying Bunds "is the only trade to
have on."
    
    ECB BACKSTOP
    While Cyprus' problems are threatening to disrupt the calm
brought to the bloc over the last eight months by the European
Central Bank's promise to protect troubled countries, that
guarantee has also kept the market reaction muted.
    With stock markets in many parts of the world at or near
long-term highs, analysts are taking the drops of the past few
sessions in stride.
    With the exception of German government bonds, the knee-jerk
flight to safety seen on Monday was showing signs of subsiding.
    The cost of insuring the debt of southern euro zone
countries against default via credit default swaps was virtually
unchanged at midday, and the dollar was flat against a basket of
major currencies after Monday's rise.
    In Asian trading, Japanese stocks jumped 2 percent and the
recovery in general risk sentiment supported Asian credit
markets, narrowing the spread on the iTraxx Asia ex-Japan
investment-grade index by five basis points. 
    Brent crude oil remained sensitive to the jitters,
however, falling 1.2 percent to $108.22. If the situation in the
euro zone deteriorates again, analysts warn it could affect the
health of the global economy.
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