GLOBAL MARKETS-Cyprus uncertainty weighs on shares, euro

Tue Mar 19, 2013 7:50am EDT

* European shares extend losses as Cyprus worries weigh
    * Euro falls back towards three-month low
    * German government bonds rise, periphery bonds dip

    By Marc Jones
    LONDON, March 19 (Reuters) - The euro, European shares and
oil fell for a second day on Tuesday, with investors unsettled
by the risk of failure for a bailout deal aimed at saving Cyprus
from default and its banks from collapse.
    A government spokesman said Cyprus's 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 and 9.9 percent of deposits in Cypriot banks.
 
    "All eyes will remain on Cyprus. Lots of uncertainty
persists, and most pressingly you don't seem to have a majority
in the parliament even if you do a partial redesign of the
deposit levy," said Tobias Blattner at Daiwa Securities.
    "Marketwise, if you fail to pass the bill it would be
catastrophic to a certain extent because, in theory, at that
moment you would be looking at a default, and you are just not
sure what would happen then."
    Euro zone ministers have urged Cyprus to let smaller savers
escape the levy, but if its parliament cannot agree, it would
put the bailout in jeopardy and raise the risk of default.
 
    A draft bill drawn up by the government in an attempt to
quell some of the public anger at the deal included plans to
impose the levy only on savings above 20,000 euros rather than
on all funds as originally set out.
    The euro was down 0.1 percent at $1.2946, near a
three-month low, and European shares were down 0.4
percent by mid-morning as they extended Monday's measured
sell-off.
    It also overshadowed a pick-up in German sentiment data from
the ZEW economic think-tank, though the figures also came with a
warning that Cyprus and the political stalemate in Italy had
raised the risk of the crisis worsening again. 
 

    BUND BOUNCE
    Downbeat car data also weighed on sentiment as figures from
the Association of European Car Manufacturers showed sales fell
more than 10 percent last month, having hit a 17-year low in
January. 
    This year is shaping up to be another tough slog for
manufacturers across Europe, as consumers and firms in
recessionary economies postpone big ticket purchases.
    London's FTSE 100, Paris's CAC-40 and
Frankfurt's DAX were down 0.2, 0.4 and 0.8 percent,
respectively, by 1130 GMT, while the concerns surrounding Cyprus
meant safe-haven German government bonds were again in demand.
    The plan to seize deposits in Cyprus has 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 if savers there worry it could happen to
them.
    The Bund future built gains steadily through the
morning before the solid ZEW data tempered some of the demand to
leave it up 30 ticks on the day at 144.24.
    "We are just waiting for another headline out of Cyprus,"
one trader said, adding that buying Bunds "is the only trade to
have on". 
    "It's quite serious. It's got bigger implications. I think
there is (a risk) of some cross-border contamination," he added.
    
    ECB BACKSTOP
    But while Cyprus's 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,
it is that guarantee that has 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 their stride.
    And 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 a default via credit default swaps was
virtually unchanged as midday approached, and the dollar was
steady against a basket of major currencies after
Monday's rise.
    In Asian trading, Japanese stocks had 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. 
    Gold, one of the main beneficiaries of Monday's
broader market sell-off, also steadied as it eased back from a
three-week high to $1,602.31 an ounce. 
    Oil remained sensitive to the jitters, however, to
drop below $109 a barrel. If the situation in the euro zone does
deteriorate again, analysts warn it could affect the health of
the global economy.
    "The situation in Cyprus, although small, goes to show that
the problems in the EU are far from over, and it will exacerbate
the declining demand within EU, keeping a lid on oil prices, if
not pushing them down," said Natixis analyst Abhishek Deshpande
in London.
    "If a deal is reached, we should see oil prices rise
slightly or even remain unchanged ... but if there is no deal,
then the chances of Cyprus leaving the EU still could be high,
and we could potentially see prices slide back further," he
added.