The excessive market euphoria that was apparent in the beginning of the month has faded and has given way to apprehensions for investors worldwide.
Even as the markets seemed to recover from the concerns over Cyprus bank run, tagging it a one off event, the news of political turmoil in Italy shook the European stock markets. Greece’s ATHEX Composite was off 4.8%. US indexes opened in red today. This certainly signals nervousness and dampened sentiments of investors. The Asian markets will also be impacted negatively.
Bank deposits that were so far considered as safe investment options, no longer seem to be safe after the Cyprus government decided to levy taxes on deposits, in a bid to secure bailout package from the European Union. The banks have remained closed for about a week and are likely to reopen with the imposition of capital controls by Cypriot authorities.
This will limit the ability of the customers to access and withdraw money for a certain period of time, and thus save the banks from bankruptcy. Either ways it is a no-win situation. A bailout deal will send the country into recession, encourage small investors to hoard cash, and prompt foreign depositors to shift to other investment bases.
The fear that banking crisis may spread over to other European countries has spooked the investors. Adding another element of uncertainty to Euro Zone, is the inability of Italian politicians so far, to put together a new coalition government since parliamentary elections in late February. All these factors put together may cause a decrease in the inflow of global funds arising from the loss of investor confidence in the Euro Zone.
In India too, the United Progressive Alliance (UPA) coalition government may find it difficult to sustain due to withdrawal of support from alliances, thus creating conditions for early elections. After DMK pulled out of the last week, the Samajwadi party has threatened to withdraw support too. If the Foreign Institutional Investors perceive that the Indian government will not have with enough bandwidth to carry out the envisaged and much needed economic reforms this year, then India too will see a decrease in the inflow of FII funds, which provide liquidity to the market.
As the sentiments have turned pessimistic, global markets will look up to political stability and announcement of measures for risk / crisis management to continue with the further run.