economy

U.S. stock futures drop as Cyprus bank levy renews euro concern

BLOOMBERG NEWS FILE PHOTO/CHRIS RATCLIFFE
A PEDESTRIAN carries an umbrella to shield herself from the sun, as she passes the entrance to the Central Bank of Cyprus, in Nicosia, Cyprus. Europe braced for renewed turmoil as outrage in Cyprus over an unprecedented levy on bank deposits threatened to derail the nation's bailout.
Posted 3/18/13

NEW YORK - U.S. stock-index futures fell as euro-area leaders imposed a levy on Cypriot bank deposits to cut the cost of a bailout, sparking concern the measure may one day be used in the bigger economies of Spain or Italy.

Citigroup Inc. and Bank of America Corp. retreated more than 1.5 percent as financial shares slumped. Transocean Ltd. slipped 1.4 percent after the offshore-rig contractor said its board opposes the dividend and director nominees proposed by its biggest shareholder, Carl Icahn.

Standard & Poor’s 500 Index futures expiring in June dropped 0.8 percent to 1,541.90 at 8:44 a.m. in New York, having earlier lost as much as 1.5 percent. Contracts on the Dow Jones Industrial Average declined 66 points, or 0.5 percent, to 14,367. The S&P 500 has still gained 3 percent this month amid optimism that central banks around the world will continue stimulus measures.

“The implications are a concern, especially for the larger economies like Italy and Spain,” Patrick Spencer, head of U.S. equity sales at Robert W. Baird & Co. in London, said in a phone interview, referring to the Cyprus levy. “You’re going to get increased choppiness in the market and a bit of flight to quality today.”

Euro-region finance ministers forced depositors in Cypriot banks to share in the cost of rescuing the island nation, reducing the cost of the bailout by 5.8 billion euros ($7.5 billion) to 10 billion euros. The country accounts for less than half a percent of the 17-nation euro-area economy.

Cyprus vote

A parliamentary vote on the levy due to take place Monday was postponed. The tax may be 6.75 percent on deposits of less than 100,000 euros and 9.9 percent for 100,000 euros or more, though a European official said Cyprus is considering charging big depositors more and small account holders less.

Equity markets are closed in Cyprus and Greece for a scheduled bank holiday today.

The S&P 500 has climbed 11 percent over the past year as the U.S. economy strengthened and European Central Bank President Mario Draghi pledged to do whatever is necessary to defend the euro. The Dow average climbed to a record 14,539.14 on March 14.

“Draghi’s backstop to do whatever it takes to save the euro is still there,” said Spencer. “With the Dow hitting all-time highs and with the S&P looking to do the same, the market’s proved very resilient, so any weakness should be taken as a buying opportunity.”

Traders are placing a record number of bets that U.S. stock-market swings will increase after a six-year low in the Chicago Board Options Exchange Volatility Index fueled speculation volatility has fallen too far, too fast.

Volatility gauge

The shares outstanding for the iPath S&P 500 VIX Short-Term Futures ETN, the most-active security that tracks changes in VIX futures, has climbed 95 percent to an all-time high of 61.9 million this year, data compiled by Bloomberg show. The total for the ProShares Ultra VIX Short-Term Futures is up 10-fold to 39.9 million last week, data compiled by Bloomberg show. The VIX has fallen 37 percent to 11.3 this year.

“If you look at the economy and all the political issues, then there are a lot of headwinds out there. And yet the market just continues to go,” Frank Braddock, senior portfolio manager with the Braddock Group of JHS Capital Advisors, said by phone from Columbia, S.C., on March 15. JHS oversees about $3.4 billion. “The fear I have is that if this psychology of wanting to push the market higher changes, then we’ll see a pretty sharp pullback and a spike in volatility.”

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