Hope for equities as Cyprus agrees bailout deal? Coutts Considers

Last-ditch deal agreed for Cyprus

…while eurozone growth deteriorates further…

…and US confidence surveys send mixed signals

Equities: Treading water as barometer drops 


Cyprus clinched a last-ditch deal with international lenders that will shut down its second-largest bank and inflict heavy losses on uninsured depositors. Endorsed by eurozone finance ministers, the plan will spare the east Mediterranean island a financial meltdown by winding down Popular Bank of Cyprus, known as Laikii, and shifting deposits below €100,000 to the Bank of Cyprus to create a “good bank”.

Deposits above €100,000 in both banks, which are not guaranteed under European Union (EU) law, will be frozen and used to resolve Laiki’s debts and recapitalise the Bank of Cyprus through a deposit/equity conversion. Equities have been treading water waiting to see if the storm in Cyprus will worsen. Now that a deal has been agreed we hope markets can get back to concentrating on what has been generally good news flow in recent weeks.

The world may not be firing on all cylinders, but a combination of good US growth and an increasingly confident Japan should provide a solid backdrop for higher-risk securities to move higher. We reiterate our preference for equities over bonds.

Bonds: An open door for the new BoE governor 


A more flexible Bank of England (BoE) may add to the souring sentiment towards UK gilts. The government, which sets the BoE’s mandate and hasn’t changed it for 10 years, looks set to open the door to more creative policy from incoming BoE Governor Mark Carney.

Consistently weak UK growth seems to be forcing the government into a more flexible monetary policy framework. In last week’s Budget, the Chancellor said the inflation target “applies at all times”, but added that the BoE can move away from it when the economy faces temporary shocks.

The BoE will also have to clearly state the tradeoffs between inflation and growth, like the US Federal Reserve’s dual mandate. The door is open for Carney to become more proactive and creative in attempting to revive the UK economy. If this pushes up inflation expectations without any significant progress on deficit reduction, gilts may suffer.

Property: ‘Help to Buy’ to help lift UK house prices 


We think the UK government’s “Help to Buy” initiative, announced in the 2013 Budget, will get first-time buyers on the property ladder, removing a key drag on UK house prices. With this scheme, our calculation of affordability (house costs as a percentage of income) falls by around 20% to levels last seen in 2003. This is based on current funding costs and a loan-to-value of 75%, and takes into account total costs by incorporating an inferred cost for the deposit.

The Government is offering loans of up to 20% of a home worth £600,000 or less, and allows purchases with as little as a 5% deposit. Previous support was only available for new homes or first-time buyers with incomes below £60,000, but the new scheme will be extended to all individuals and houses both new and old. Helping first-time buyers get on the property ladder removes a key constraint and gives us a more positive view on UK residential property.

Currencies: Strong job market lifts Aussie dollar 


Stronger-than-expected Australian employment data gave the country’s currency a boost, as expectations for an interest rate cut were set back. In February, 71,500 jobs were added to the Australian economy, 10,000 more than forecast and the sharpest monthly gain since 2000. The unemployment rate held at 5.4%.

Expectations for further rate cuts from the Reserve Bank of Australia (RBA) had weighed on the Australian dollar through the start of March. We now expect it to continue strengthening as investors price in unchanged rates from the RBA. However, with RBA Governor Stevens having recently indicated that the Australian dollar was modestly overvalued, scope for further gains appears limited.