Picture: REUTERS
Picture: REUTERS

TOKYO — Stocks and commodities fell sharply in Asia on Monday as investors were rattled by a radical bail-out plan for Cyprus and piled into safer assets including the dollar, gold and sovereign debt.

European markets are also expected to fall, with financial spread betters predicting London’s FTSE 100, Paris’s CAC 40 and Frankfurt’s DAX to open as much as 2% weaker. A 1.4% slide in US stock futures suggested a lower Wall Street start as well.

Cyprus and international lenders agreed at the weekend that savers in the island’s outsized banking system would take a hit in return for the offer of €10bn in aid, breaking with previous European Union (EU) practice that depositors’ savings are sacrosanct and raising fear that it could set a precedent for future eurozone bail-outs.

The MSCI’s broadest index of Asia-Pacific shares outside Japan slumped 1.8% to its lowest level since January 2. It was the steepest one-day fall since late July.

The materials sector led the decline with a 2.2% slide as London copper shed 1.8% to $7,610 a tonne. Resources-reliant Australian shares plunged 2%.

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

"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’s parliament does. If they reject these measures, then markets may at the least see some increased uncertainty in the period of negotiations," he said.

Crude oil and Brent both tumbled 1.1% to $92.46 a barrel and to $108.62 respectively.

Assets perceived as safe havens were bolstered by the sharp risk aversion, pushing spot gold as much as 1% higher to a three-week high of $1,608.30 an ounce earlier.

Bullion was last trading up 0.4% at $1,597.81.

"It’s a Cyprus shock. The euro fell, and crude followed that lower," Newedge commodity sales manager Ken Hasegawa said in Tokyo. "We don’t know what’s going to happen, and it’s becoming an uncertain factor."

Cyprus was working on a last-minute proposal to soften the impact of a bank deposit levy on smaller savers ahead of a parliamentary vote on Monday on the measure central to the bail-out.

Flight to quality

The dollar index, which measures the greenback against a basket of major currencies, strengthened 0.7% to 82.824 against a basket of major currencies, inching closer to a seven-month high of 83.166 hit last Thursday. The euro touched a three-week low of $1.2888.

Investors flocking for safety drove yields down for benchmark government bonds in Asia. The 10-year Japanese government bond yield fell to 0.590%, just above a 10-year low of 0.585% hit on March 4.

Australia’s three-year cash yields shed 15 basis points to 2.96%, the biggest daily drop since May last year. Ten-year US Treasury yield plunged eight basis points to 1.91% in Asia.

Asian credit markets faltered along with the significant retreat in broad risk assets, widening the spread on the iTraxx Asia ex-Japan investment-grade index by eight basis points.

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

But 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.

Fear overblown

The yen rose broadly early in the session, briefly touching ¥93.45 against the dollar and ¥121.585 against the euro, as well as gaining nearly ¥2 against the risk-sensitive Australian dollar. The yen stabilised later to stand at ¥94.61 against the dollar and ¥98.04 against the Aussie.

The yen’s rebound weighed on Japanese shares, with the Nikkei stock average slipping 1.9%.

While uncertainty over how the broader eurozone markets would react to Cyprus’s news later on Monday weighed on sentiment in Asia, some say fear of contagion risk is overdone.

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

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

Reuters