Market Drivers: Cyprus, U.S. Market Rally, Revised U.S. Q4 GDP

Ski resort of Krasnaya Polyana

Ski resort of Krasnaya Polyana (Photo credit: Wikipedia)

As we head into the upcoming three day Easter weekend, the market has once again proven resilient in the face of global headwinds. Both the S&P 500 and DJIA at or close to new all-time highs, with any hint of selling pressure being offset by bargain hunters buying shares. Here are three things that have been driving the market this week:

Cyprus Bank Resolution

Just hours before a deadline, Cyprus clinched a last-ditch deal with international lenders in return for a 10 billion euro ($13 billion) bailout. Basically the deal calls for a shutdown of the second largest bank in the region, Laiki, with accounts with savings of 100,000 euros or less being transferred to the Bank of Cyprus (and being spared the haircut that depositors over 100,000 euros will face).  Losses for those  above that threshold are estimated in the billions. US Markets initially cheered the decision, with markets rallying following the Monday opening bell. However the euphoria was short lived as Dutch Finance Minister Jeroen Dijsselbloem, (a leader of the Euro-group Finance Ministers), said that the Cypriot plan was a template for Europe, which sent markets into a sell off. Banks in Cyprus reopened on Thursday to long lines, and tight controls on transactions after a 12 day lockdown. Societe Generale strategist Albert Edwards wrote, “The Troika have managed to exponentially increase concerns on how safe retail deposits are in the Eurozone, it matters not that the final Cypriot bailout plan did not touch smaller savers. The fact that this plan was originally sanctioned, despite deposit insurance, will have shaken small saver confidence to the bone. It certainly has shaken my confidence."

Mixed US Data

Early in the week, traders had a mix of economic data to sift through and decipher. The market had little reaction to February durable goods orders which saw an increase of 5.7%, better than the anticipated 3.8%, and following a prior month's revised decrease of 3.8%. Ex-transportation related items, durable goods orders decreased by 0.5%, a shade worse than the downtick of 0.2% that had been anticipated. New home sales in February hit an annualized rate of 411,000, lower than January's revised 431,000, and worse than the rate of 426,000. We also had the latest consumer confidence numbers for March come in at 59.7, well below the expected a reading of 66.9. Following the combination of results, markets chose to focus on the positive side. As a result, markets staged a slow steady rally throughout Tuesday afternoon, once again testing new highs.

Revised Q4 GDP

The third estimate of Q4 GDP came in at 0.4%, just below analysts’ estimates which called for a 0.5% gain. This rate was the slowest since Q1 2011, but still higher than the government’s previous estimate of a 0.1 % growth rate. The upward revision was largely due to a smaller net export gap, stronger growth in nonresidential structures, and somewhat higher inventory growth. The Fed has stated that much of the Q4 slowdown was weather related, and some of the factors should reverse in Q1.  That being said, it appears numbers are looking better, despite the impact of the payroll tax increases on personal spending. Going forward there are still key challenges for the growing economy which lie ahead, most notably employment, sequestration, and issues in the Eurozone. The GDP is the country's most comprehensive economic scorecard, and healthy GDP growth usually translates into strong corporate earnings, which ultimately should bode well for the stock market.

Weekly Bonus - Snow Storage?

Krasnaya Polyana, Moscow – Usually, this little town just outside of Sochi (the home of the 2014 Winter Olympics) would be more concerned with avalanches than a lack of snow. But that is just the case as unseasonably warm weather has organizers worried about a shortage of white powder for the games next year. So in preparation, they are storing 450,000 cubic liters of it “high up in the mountains” in seven storage areas—just in case conditions are too warm during the games. “I want to assure all the competitors that there won’t be any shortage of snow next February even if we encounter even warmer temperatures next year,”said Sergei Bachin, director of a ski resort that will host some events. The estimated cost to organizers for this unforeseen dilemma? An additional $11 million!   

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