Dollar, gold firm as risk assets slump

Stocks and commodities fell sharply in Asia on Monday as investors were rattled by a radical bailout plan for Cyprus and piled into safer assets including the United States dollar and gold.

Reuters reported that Euro zone finance ministers want Cypriots to pay up to 9.9 per cent of their deposits in return for a ¤10bn aid package.

If approved by the island’s parliament on Monday, it will be the first time savers have had to foot part of the bill for a European bailout, raising fears that the model could become a precedent for future bailouts in the euro zone.

A government source said Cyprus was working on a last-minute proposal to soften the impact on smaller savers of a bank deposit levy after a parliamentary vote on the measure central to a bailout was postponed until Monday.

The MSCI’s broadest index of Asia-Pacific shares outside Japan slumped 1.5 per cent to its lowest level since January 2. It was the steepest one-day fall in two weeks.

The materials sector led the decline with a 1.8 per cent slide as London copper shed 1.7 per cent to $7,619.50 a metric ton.

Crude oil and Brent both tumbled 1.4 per cent to $91.17 a barrel and to $108.32 respectively.

Resources-reliant Australian shares plunged 1.4 per cent.

Assets perceived as safe-haven were bolstered by the sharp risk aversion, pushing spot gold as much as one per cent higher to a three-week high of $1,608.30 an ounce earlier. Bullion was last trading up 0.3 per cent at $1,596.36.

The dollar strengthened 0.6 per cent to 82.782 against a basket of major currencies, inching closer to a seven-month high of 83.166 hit last Thursday.

“What happened this morning is best described as a precautionary sell-off by the markets, some profit taking and some lighting positions, in case this situation escalates,” said Ric Spooner, chief market analyst at CMC Markets in Sydney.

Risk markets have seen similarly big one-day moves over the past few months, and despite today’s moves, markets have so far remained within the trading range of the past several months.

There was potential for things to get worse here, with worries that the tough attitude shown by European creditor nations over the weekend could make use of the European bailout funds more difficult and in turn lessen the effectiveness of the European Central Bank’s bond buying safety net, he said.

Since much of the market rally so far this year has been based on an assumption that short-term risks were significantly reduced, some of buying momentum could be wound down if such a view were to change.

“But it’s too early to make that call, we have to see what happens from here. First step will be to see what Cyprus’ parliament does. If they reject these measures, then markets may at the least see some increased uncertainty in the period of negotiations,” Spooner said.

The yen rose broadly early in Asia, briefly touching 93.45 yen against the dollar, strengthening sharply from around 96.11 yen in late New York on Friday. It was last trading at 94.65. The euro sank to a low of 121.585 yen from around 124.93 yen late on Friday, and was last at 122.12.

The risk-sensitive Australian dollar lost almost two full yen in choppy trading before steadying at 98.04 yen.

The euro touched a three-week low of $1.2895 early on Monday, down from late Friday’s level around $1.30, and remained pressured.

The yen’s rebound weighed on Japanese shares, with the Nikkei stock average slipping 2.1 per cent.

Wall Street stocks fell on Friday as a drop in JPMorgan Chase led to the end of Dow Jones industrial average’s 10-day rally, while European shares retreated from 4-1/2-year highs.

While uncertainty over how the development in Cyprus will affect the broader euro zone markets later on Monday will weigh on investor sentiment in Asia, some say fears of contagion risk are overdone.

“There will certainly be confusion in Cyprus and investors looking just at headlines may fret about its case becoming a model,” said Yuji Saito, director of foreign exchange at Credit Agricole in Tokyo.

“I doubt that the case in Cyprus will trigger contagion risks across the euro zone, as the size of the country is too small and its industrial structure is very different from other euro zone members, in that Cyprus is dependent on just tourism and the financials sector,” Saito said.