The problems in Cyprus and Italy haven't dented investors' confidence largely thanks to the actions of central banks
The near collapse of Cyprus, avoided only by draconian and unprecedented measures including a raid on savers' bank accounts, and political turmoil in Italy after February's inconclusive elections should have sent ructions through global stock markets last week.
In fact, with the exception of continuing jitters on European exchanges, investors showed remarkable calm through the latest instalment of the neverending eurozone crisis. In America, the S&P 500 even soared to a record close on Thursday, surpassing levels last seen in 2007 and following in the footsteps of the Dow Jones Industrial Average, which had reached its own peak on 5 March. The FTSE 100, currently less than 10% shy of its own record, ended the week virtually unchanged.
Markets have partly been buoyed by signs of recovery in the global economy, particularly in the US. But the main support for shares has been the continuing actions by central banks to provide a lift to the economy through stimulus measures such as quantitative easing and bond buying. Investors, who are struggling to find decent returns in a low-interest-rate environment, have decided to stick with equities for the moment, betting that the money tap will not be turned off in the immediate future. But with Cyprus coming close to the precipice, in danger of default and leaving the eurozone, that optimism was severely tested during the week. The danger of contagion spreading elsewhere, to Slovenia, Spain, Italy and even France, was enough to make Cyprus the No 1 economic worry. So while a last-minute deal to bail out the Mediterranean island provided some relief, the imposition of capital controls and the losses forced on depositors with more than €100,000 in the bank meant the situation remained volatile.
Eurogroup head Jeroen Dijsselbloem hardly helped matters with remarks that were interpreted as suggesting that the Cyprus bank raid could be a template for other bailouts, although there was later some half-hearted backtracking from the idea.
And as Cyprus reopened its banks on Thursday after 12 days shut, there was no sign of the feared scramble by investors to withdraw their cash. The capital controls and limits on how much could be taken out of accounts meant there was little point in savers swarming into the banks in a panic.
So markets – mostly – kept their cool. The FTSE 100 finished up 24.18 points at 6411.74 on Thursday (its last day of trading before Easter), up from 6392 on Monday. Since the start of the month the index has gained 1% and since the turn of the year the rise is an impressive 8.7%.
The S&P 500, which had been hovering at record levels for more than two weeks, finally achieved the target on Thursday, a 6.34 point rise to 1569.19 being enough to do the job. Asian shares also closed in positive territory with the Nikkei 225 up 0.5% yesterday, up marginally on the week.
In Europe, perhaps unsurprisingly, the picture was more downbeat, although it was hardly a panic. Germany's Dax dipped around 1.5% on the week to 7795 while France's Cac slipped 1% to 3731. In two countries where there is most uncertainty and the risk of contagion is real, Italy's FTSE MIB fell 4% to 15,338 and Spain's Ibex lost nearly 5% to 7920. And with the situation in Cyprus keeping the spotlight on Greece, the Athens market was down more than 6%.
Clearly European markets are being more influenced by the continuing crisis in the region than by central bank intervention, while the reverse is true for the UK, US and Asian exchanges. Overall, analysts said the Federal Reserve was likely to continue giving support for the moment. Chris Beauchamp, market analyst at IG said: "This may be a Fed-inspired rally, but it is a rally nonetheless; over the course of the last three months markets have taken almost everything in their stride, be it US budget crises, inconclusive Italian elections or a bailout of yet another eurozone member. Having had such a good start to the year, the question is now whether the run can be sustained. Cynics will point to the abundance of problems, but the underlying theme today remains the same as at the end of 2012; a supportive Federal Reserve is not to be trifled with."Meanwhile Bruce McCain, chief investment strategist at Key Private Bank in Cleveland, told Reuters the new peak on the S&P reflected the fact that many of last year's anxieties had receded. But he added: "However, this could be the start to a more realistic look at the problems that still haven't gone away. Some degree of caution is probably still merited, with the problems in Cyprus probably only the beginning to what we could see in coming months."
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