Following last week’s repeated stock market highs, the tone at the start this week is decidedly bearish, with unsettling news out of the eurozone rattling markets worldwide. U.S. stocks opened lower this morning, with the S&P 500 and the narrower, price-weighted Dow Jones Industrial Average down 0.62% and 0.31%, respectively, as of 10:05 a.m. EDT.
This week will see the outcome of the Fed’s regular FOMC meeting on Wednesday. Don’t expect any changes to rates or the bond-buying program, but investors will be carefully parsing the Fed’s language for clues on the “flight path.” On the same day, we’ll have news that actually relates to corporate fundamentals, as Oracle Corporation (NASDAQ:ORCL) and FedEx Corporation (NYSE:FDX) both report earnings.
The Cyprus situation in three questions
1. What happened in Cyprus?
Early on Saturday, Cyprus, which sits off the coast of Greece, agreed to a controversial bailout plan of its banks with international lenders, including the European Union. The plan is unusual because it effectively forces all bank depositors to take a haircut (6.75% on accounts with less than 100,000 euros and 9.9% on accounts above that threshold; I write “effectively” because, nominally, it is being packaged as a tax). Importantly, according to the Financial Times, “the depositor levy was demanded by a German-led group of creditor countries to bring down the bailout’s price tag from 17 billion euros.”
Cyprus is, in itself, insignificant in economic terms. However, the “Cypriot example” is a stark reminder that the eurozone crisis writ large is alive and well. Germany is making perfectly clear that it won’t pick up the full tab for its Southern European partners. Spaniards and Italians must now be wondering whether their deposits are entirely safe, given the debt burden weighing on their banking system and their sovereign, respectively. Last year’s pledge from European Central Bank president Mario Draghi to do “whatever it takes” to save the euro was a powerful salve for the crisis, but its main effect was improving investor sentiment — which can change quickly.
3. What is the impact?
European stock markets are in the red today, with Italy and, particularly, Spain suffering the heaviest losses. Spain’s banking system has yet to fully address the legacy of the property boom and crash (take a look at Banco Santander, S.A. (ADR) (NYSE:SAN)‘s share price this morning). Wall Street is also down, and big banks are especially sensitive to this type of macroeconomic headline risk: Bank of America, Citigroup, JPMorgan, Goldman Sachs, and Morgan Stanley are all underperforming the broad market today.
The article 2-Minute Primer: Why Cyprus Is Driving the Market originally appeared on Fool.com and is written by Alex Dumortier.
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