Cyprus fallout hits Asia hard – N225 forming Evening Star

Asian stocks collapsed spectacularly on Monday morning due to Cyprus bailout deal meted out over the weekend. The Euro-group has demanded “appropriate burden sharing” by Cyprus in order to receive bailout funds worth around 10Bln Euros. This comes in the form of levies on bank deposits to the tune of 9.9% for deposits over 100,000 EUR and 6.75% for deposits under.  According to Euro-group President Djisselbloem, it “seems justified” to tap all deposit holders to help out in the financial system that is regarded as “too large”. Djisselbloem has also stated that there are contingency plans to address capital flight issues – which is seen as a certainty as no depositor will willingly take a write down on their savings. One can only imagine the bank queue during as people withdraw funds and put it in any other European banks. Even small depositors who do not have access to cross-national transfers facilities may be better off keeping their cash under their beds. But even that may not be possible with Cyprus closed for a bank holiday on Monday and the levy reported to be imposed before Tuesday. Expect angry mobs outside Cyprus banks this week; the fallout is not going to be pretty.

The market appears to be equally angry, with risk appetite coming off heavily. However, when we think about it, this is actually a good idea that Cyprus is helping out domestically on its own bailout, especially when rumors have been rife that the banking system is filled with “Russian Money”. Any bailout to Cyprus would be seen by many common-folks as throwing their tax to safe rich Russian Oligarchs, something that has been used heavily by opposition parties across most European nations with election season coming. However, Euro-group cannot afford Cyprus to collapse, and hence this solution is a win-win in theory as it allows the depositors to finance a significant portion of their own bailout – a move that should pacify voters without risking yet another financial crisis. So why is the market so upset over this bailout?

Well, this bailout plan sets an awful precedence for future bailouts of larger states like Italy and Spain. Even though there is no evidence that the Euro-group may impose the same terms (especially since terms to Greece has been much more lenient comparatively), the surprise onerous nature of this latest bailout package is spooking traders that were still relatively bullish due to hopes of easy bailout funds to the aforementioned states. This is also one of the most creative imposition Euro leaders have come out with since crisis’s onset, and market is worried that they may get even more creative (or desperate, depending on your take) in order to finance future bailouts. A new era of bailout has now been ushered – cheap bailout funds are considered gone. Free bailout is dead, long live free bailouts.

Weekly Chart

With the strong negativity in the market, assets that have been running almost exclusively on bullish sentiments have taken a huge hit. Enter Nikkei 225 which was propped up mostly by BOJ’s stimulus hope. Price gapped 1.8% lower on open, setting the week on a bearish tone. Previous week was already less than fantastic for the bulls as price merely formed a doji – highlighting weakened bullish resolve. If this week ends with a bearish candle, preferably closing below previous week’s low, an Evening Star pattern will be formed, adding to the likelihood that a reversal/significant pullback may occur.

Hourly Chart

Hourly Chart is more bullish though. Stochastic indicator is bottoming out after the initial sell-off, while Fib 76.4% is still being respected though price is still heading in the wrong direction. Current Fib line is also the confluence with tops found between 13th-14th Mar. If price manage to hold from here, a retest of 61.8% Fib is possible and a break higher may reignite bullish momentum and negate the threat of bearish sell-off both on short and long-term basis.

The question we need to ask is the follow-through potential of current bearish sentiment. Is the reaction to Cyprus sustainable, or will the overall bullishness prevail? Continue to watch price actions around supports/resistances to have a better idea of how bulls and bears are performing. Fundamentally, there may yet be hope for Cyprus depositors; Parliament is still yet to vote on the bailout terms and President Anastasiades is reportedly trying to amend bailout terms to reduce levies on smaller deposits while raising it on the rest (potentially hitting the rumored Russian Oligarchs more heavily and leaving the common folk out of the bailout burden). If this rumor is true, we could still yet see a strong recovery this week.

More Links:
EUR/USD – Sharp Drop to Start Week to Down Below 1.29
Week in FX Europe – Is Sterling’s Magnetic Option Ride Over? Maybe Next Wednesday

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