March 25. Cyprus deal averts euro break-up
–Friday saw continued pressure on the front end of the curve as the Cyprus banking crisis leads to reduced confidence and a possible flare-up of bank funding costs. As of this morning, a deal has been reached that will affect depositors of two banks, Laiki which will be closed and Bank of Cyprus which will be recapitalized. Deposits under €100k were spared, but the haircut on large deposits will be a multiple of the original 10%.
–Markets have breathed a sigh of relief that a deal was reached, front euro$ contracts rallied, back contracts fell. The euro popped up to 131 but has eased off of that level. US stocks made new highs. The broader question is whether large depositors throughout the EU will begin to pull their funds; certainly confidence in the banking (and political) system has eroded at the margin. US financial markets have been the beneficiary of this capital flow, though it’s somewhat paradoxical that US stocks run higher just as demand for products from the EU declines.
–Today’s news includes Chgo Fed Nat’l Activity Index, last at -0.32 and will likely be negative again. Dallas Fed expected 3.4 from 2.2. Dudley speaks at 12:30 to Economics Club, Bernanke at 1:15 NY time with BoE’s Mervyn King on lessons from the crisis. I guess that should be “ongoing” lessons.
–Large plays Friday: New buyer of 4EU (gold Sept) 9750p 15.5 to 17.5 in 30k, delta around -32. Also a new buyer of 30k 4EZ 9750/9700 put spreads. Sales were added in 3EU 9812/9787ps 1×2, selling 2 legs over at 2, in 60k, open interest now 112k by 176k. As a seller of the 2 puts, that position is long about 7 delta.
