Wall Street reacted to the news of the E.U./Cyprus bailout plan with a second straight day of losses. The plan, a $13 billion bailout package for the island-nation’s insolvent financial institutions, is predicated on a 6.75-10 percent tax on private bank deposits, and has insinuated a tone of uncertainty bordering on fear into the end of the Dow’s 10 consecutive record-high closes of the prior two weeks.
The Dow Jones Industrial Average ended the day with a loss of 0.43 percent at 14,452.06, with the added downward pressure of J.P. Morgan's (JPM) continuing woes, the result of ongoing revelations about the behavior of the bank’s senior-most executives, including CEO Jaime Dimon himself, during last year’s London Whale scandal. JPM ended the day down 1.02 percent to $49.51 per share.
The Nasdaq lost 0.35 percent on the day to close at 3,237.59, while the S&P 500 slipped further away from the record high it had nearly reached last Thursday, down 0.55 percent to 1,552.10. Meanwhile the Euro lost 0.96 percent against the dollar to end at $1.297.
The losses were on a steeper downward trajectory until conflicting reports out of Cyprus alternately confused and/or relieved investors and financial press alike, causing a brief rebound in share prices that somewhat blunted Monday’s bad news, before settling lower.
The global economy was unsettled by this very first instance of deposit taxation in the nearly 5-year wake of the financial crisis, fearing that it could set a precedent for the future. This was compounded by the fear of a run on Cypriot banks having a contagious effect on other troubled Eurozone economies, a event whose implications would be far reaching.
Additionally troubling, or reassuring depending on the point of view, is the latent implication that European politicians led by Germany and France would use such a heavy-handed measure, one with such palpable consequences, with political goals in mind; Cyprus is known to be an extremely cheap and regulation-free environment for money of questionable origins, particularly Russian money.
On the other hand, domestic and global revulsion at the deposit tax, 6.75 percent for accounts under 100,000 Euros and 10 percent for larger accounts, sent the island’s politicians scrambling to rework the deal into a more palatable format. This will most likely involve shifting a significantly larger percentage of the tax to the bigger accounts, where the dirty money is likely to be hiding.
Furthermore, an immediate run on the banks was not possible, given that today was a national holiday in Cyprus and banks were closed. The government announced that they would remain so until Thursday, which also seemed to calm at least some of the initial fears.
Still, the information coming out of the Mediterranean island was not entirely clear and the matter is far from resolved. For the time being, the president of Cyprus has said that there are currently not enough votes to pass such an unpopular measure through parliament.
U.S. markets were reasonably shook up by the news, but many interpreted this as the opportune moment for stocks to take a much needed breather, after the Dow’s tremendous run had at least some worried about a repeat of 2007, where tremendous gains were made only to eventuate in the collapse of the housing bubble not long after.
DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer