Euro, Stocks Drops; Gold, Treasuries Rally on Cyprus

By Jason Clenfield & Adam Haigh 

The euro fell to its lowest level this year, while stocks, oil and copper slumped, as an unprecedented levy on Cyprus’s bank savings threatened to throw Europe back into crisis. The yen, gold and Treasuries climbed.

The euro dropped 1.4 percent to $1.2897 and the yen gained 0.6 percent to 94.75 per dollar as of 1:42 p.m. in Tokyo. The MSCI Asia Pacific Index of shares lost 1.6 percent, while Standard & Poor’s 500 Index futures slid 1.4 percent. Oil fell 1 percent and copper lost 1.9 percent, the most since November. Gold advanced as much as 1.1 percent. U.S. Treasury 10-year yields headed for their biggest drop in three weeks. Euro finance ministers reached an agreement on March 16 forcing depositors in Cypriot banks to share in the cost of the latest euro-zone bailout. Moody’s Investors Service said today the levy is negative for bank depositors across Europe, whileBill Gross at Pacific Investment Management Co. said it moves “risk-on” trades to the back seat.

“More contagion fears will spread through investors and it will encourage depositors in the European periphery to move their funds to a safer place, either under the pillow or to Germany,” said Mark Bayley, a Sydney-based credit strategist with advisory company Aquasia Ltd. “This is essentially a bail- in of depositors and sets a dangerous precedent.”

Cypriot President Nicos Anastasiades appealed to lawmakers in Nicosia to ratify the levy today, which would raise 5.8 billion euros ($7.6 billion). Scenes of Cypriots lining up at cash machines raised the specter of capital flight elsewhere.

Euro Slides

The euro slid against the dollar to its lowest level since Dec. 10, dropped 2 percent to 122.16 yen and weakened 0.9 percent to 1.21696 Swiss francs.

The shared currency has risen 2.4 percent against the dollar since European Central Bank President Mario Draghi on Sept. 6 announced an agreement for an unlimited bond-buying program to regain control of interest rates. It has climbed 2 percent over six months, according to Bloomberg Correlation Weighted Indexes tracking 10 developed-market currencies.

The yield on U.S. 10-year Treasury debt slid nine basis points to 1.9 percent, the lowest since March 6 and set for its biggest one-day decline since Feb. 25, according to Bloomberg Bond Trader data. Japan’s 10-year bond yield fell 2.5 basis points to 0.595 percent, near the 0.585 percent on March 5 that was the lowest in almost a decade. Yields on similar-maturity debt inAustralia dropped 13 basis points to 3.5 percent.

“The news on Cyprus is a cause for risk-off sentiment and is spurring buying of Treasuries amid flight to quality,” said Hiromasa Nakamura, a senior investor at Mizuho Asset Management Co. in Tokyo, which manages the equivalent of $34.5 billion.

Bond Risk

Bond risk was set for the biggest jump since Sept. 20. The Markit iTraxx Asia index of 40 investment-grade borrowers outside Japan jumped six basis points to 107, Royal Bank of Scotland Group Plc credit-default swap data show.

Confidence will be tested as Greece sells 1 billion euros of three-month Treasury bills tomorrow. Spain auctions bills the same day, followed by a bond sale on March 21. Portugal sells three- and 18-month paper on March 20, while Italy offers bonds on March 25.

“People will be watching the countries that are just returning to debt markets, and it may well cost them a few basis points,” said Hans Kunnen, the Sydney-based chief economist at St. George Bank Ltd. He said the style of the rescue has “sent a shiver down the spine of Europe. If Cyprus, why not other nations?”

Progress Reversed?

Last week, Ireland completed its first 10-year sale since the near-collapse of its financial system forced the nation to seek a European Union bailout in 2010. Greece’s bonds were the world’s best performers this year, gaining 9.2 percent in local- currency terms, Bloomberg/EFFAS indexes show. Cyprus accounts for less than half a percent of the 17-nation euro economy.

“If this had happened three years ago, you had to be pretty worried because the U.S. economywas a lot more fragile and there was more concern about China having a hard landing, saidShane Oliver, Sydney-based head of investment strategy at AMP Capital Investors Ltd., which has $126 billion under management. “Now we’ve got a situation where bailouts are already in place for Ireland, Portugal and Spain, and economic indicators out of Europe are pointing up, instead of down.”

Italy’s 10-year bond yield closed at 4.59 percent last week, up 10 basis points from the start of the year and compared with 6.71 percent in July. France (GFRN10)’s 10-year yield dropped for a fourth day to 2.06 percent. The rate on similar-maturity Spanish bonds closed at 4.90 percent on March 15, down more than 30 basis points in 2013. Benchmark German bunds closed at 1.45 percent last week.

Stocks Drop

Four shares fell for each that rose on the MSCI Asia Pacific Index, which is headed for its biggest decline in a month. Shares on the gauge, that has climbed more than 20 percent since May, trade at 14.8 times estimated earnings compared with 14.1 for the S&P 500 and 12.8 for the Stoxx Europe 600 Index, according to data compiled by Bloomberg.

The Nikkei 225 Stock Average (NKY) dropped 1.9 percent. Gains in the yen sent exporters Toyota Motor Corp. and Sony Corp. down more than 2.5 percent.

Hong Kong’s Hang Seng Index (HSI) plunged 2.1 percent, poised for the lowest close in almost four months, as HSBC Holdings Plc slid. Volume on the city’s benchmark gauge was 64 percent above the 30-day intraday average, data compiled by Bloomberg shows.

West Texas Intermediate oil dropped from the highest level in three weeks, declining as much as $1.31 to $92.14 a barrel. Copper traded at $7,609 per ton, falling the most since Nov. 9.

Gold climbed above $1,600 an ounce, gaining as much as 1.1 percent to $1,608.60 an ounce, the highest since Feb. 27. The precious metal traded for $1,598.04, up 0.4 percent.

To contact the reporters on this story: Jason Clenfield in Tokyo at jclenfield@bloomberg.net; Adam Haigh in Sydney at ahaigh1@bloomberg.net

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