Renewed Turmoil in Europe
In the recent EU Summit, the European finance ministers agreed to extend the bailout for Portugal and Ireland. They also agreed on the Euros 10 billion rescue plan for Cyprus, a reduction from the original Euros 17 billion. However, the banks in Cyprus will have to impose a levy on bank deposits in a progressive manner compared to the previously announced 6.75 percent levy on bank deposits up to Euros 100,000 and a 9.9 percent levy on deposits above that amount. On 19 March, the Cyprus lawmakers voted the levy down as depositors and the Russia government both cried unjust, urging the EU-17 finance ministers to negotiate a new package. This unprecedented levy could have triggered scare of similar levies being imposed on other peripheral European banks, raising renewed concerns on the European debt crisis and capital flight to safer havens. The risk-off scenario has increased demand for alternatives such as gold and safer assets such as U.S. Treasuries.Better-than-expected Economic Data in the U.S. and Germany and Chinese Inflation
Stronger economic numbers from the U.S. and Germany have tempered the market’s enthusiasm in gold. The February housing starts in the U.S. rose to 917,000 compared to an expected 915,000. The March ZEW consumer confidence index in Germany has risen to a three-year high in March, giving hopes that Germany will return to a positive GDP growth in Q1. In China, the PBOC governor warned on the high inflation rate in February of 3.2 percent and released a survey saying that 68 percent of the Chinese households believes that housing prices are too high. The government is likely to tighten the property market again, thus curbing any expectations of further monetary easing in the short-term.Watching the Fed
With the ongoing Cyprus and Euro situations and the better economic data from the U.S., the Fed will likely in his FOMC announcement on 20 March incorporate some optimism in the U.S. outlook and mention the downside risks of global financial markets while largely maintain the low interest rate and the existing QE program.
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