MarketView for March 20

Summary

The major equity indexes moved higher on Wednesday, with the S&P 500 snapping a three-day losing streak as the Federal Reserve reassured investors that it would keep supporting the economy. The Dow is now up 10.7 percent for the year, while the S&P 500 is up 9.3 percent.

The housing sector was among the day’s best performers after Lennar reported first-quarter earnings well above Street expectations. Lennar ended the day up 4.8 percent to close at $43.40, its highest close since June 2007. Helping out the housing industry were lower interest rates and rising rents, both of which have contributed to increased home sales.

The Dow hit an intraday record high but fell short of closing at another record. The view that the Fed will keep interest rates at record lows for years has helped drive continuing momentum this year, along with signs of a strengthening economy.

In its statement, the Fed said it would stick to its $85 billion monthly bond-buying stimulus, citing still high unemployment levels, but said it would take into account the possible risks of its policies. The statement, and comments by Fed Chairman Ben Bernanke, came as the market grapples with banking woes in Cyprus, the most recent flare-up in the euro-zone debt crisis.

Cypriot leaders held crisis talks on Wednesday to avoid a financial meltdown a day after the country's parliament rejected a tax on bank deposits, which had been proposed over the weekend by European Union officials. One of the main concerns on the Street is that a collapse of the banking system in Cyprus will tighten credit across Europe and become another hurdle in the region's bumpy road out of economic crisis.

Shares of Adobe Systems were higher on Wednesday, a day after the company raised its full-year adjusted earnings forecast. The shares ended the day up 4.2 percent to close at $42.46.

Among the day's decliners, shares of FedEx fell 6.9 percent to $99.13, its largest daily percentage drop since September 2011, after it cut its full-year forecast and reported a 31 percent drop in quarterly earnings due to restructuring costs and weakness in its air freight express business. As a result, The Dow Jones Transportation Average fell 0.4 percent, weighed down by FedEx.

Approximately 5.9 billion shares changed hands on the three major equity exchanges, as compared with the 2012 average daily closing volume of about 6.45 billion shares.

It Is a Dangerous Game

Cyprus is playing a dangerous game as it tries to circumvent various geo-political forces. Extending a bank lockdown until next week with a nationalization of pension funds under consideration, Cyprus is scrambling to avert a financial meltdown after rejecting the terms of a bailout from the European Union and turning to Russia for a lifeline.

Banks in Cyprus, shut since the weekend, are to stay closed for the rest of the week and will not reopen till Tuesday after a holiday weekend, thereby extending the misery of Cypriot businesses many of whom are already feeling a tightening of the financial noose.

With Finance Minister Michael Sarris in Moscow, Russia's finance ministry said Cyprus had sought a further 5 billion euros, on top of a five-year extension and lower interest on an existing 2.5-billion euro loan from Moscow. Russia has a special interest, since many of its citizens keep savings in Cyprus.

In a vote on Tuesday, the Cyprus legislature threw out a proposed tax on bank deposits in exchange for a 10-billion euro bailout from the EU, a stunning rejection of the kind of strict austerity accepted over the past three years by crisis-hit Greece, Portugal, Ireland, Spain and Italy.

The EU demand has exposed tensions with Moscow over how to keep Cyprus afloat. Russian Prime Minister Dmitry Medvedev said the bloc had behaved "like a bull in a china shop" and compared its proposals, which would force Russian customers to contribute to the rescue of Cypriot banks, to Soviet-era confiscations. At the same time, the European Central Bank kept the pressure on, warning that it would have to pull the plug on Cyprus unless the country took a bailout quickly.

Despite the looming threat of default and a banking collapse, Cypriots on Tuesday balked at EU demands for a levy on bank deposits to raise 5.8 billion euros, an unprecedented measure that opponents said would have violated the principle behind an EU-wide guarantee on deposits of up to 100,000 euros.

The government said a "Plan B" was in the works, with conservative President Nicos Anastasiades - elected last month on a mandate to secure a bailout - locked in meetings with party leaders, ministers and officials from the troika of EU, ECB and International Monetary Fund lenders.

Also on the table was a proposal to issue a bond on the basis of state assets, including future gas revenues. Some officials spoke of combining such measures with a levy on bank deposits, though at a lower level than originally planned.

Cyprus Energy Minister George Lakkotrypis was also in Moscow, officially for a tourism exhibition, but fuelling talk that access to untapped offshore gas reserves could be on the table as part of a deal for Russian aid.

Cyprus is a haven for billions of euros squirreled abroad by Russian businesses and individuals - a factor, too, in the reluctance of Germany and other northern euro zone states to bail out Cypriots without a contribution from bank depositors.

The Cypriot government denied a Greek media report that Cyprus had reached a deal for Russian investors to buy the island's second largest bank, Cyprus Popular, which was taken over by the state last year. The island's banking sector has been crippled by its exposure to bigger neighbor Greece. Athens said Greek branches of Cypriot banks would also stay shut till the weekend.

The proposed levy on deposits would have taken nearly 10 percent from accounts over 100,000 euros. Smaller accounts would also have been hit, although the government proposed softening the blow to spare savers with less than 20,000 euros.

Chancellor Angela Merkel, facing an election this year in Europe's main paymaster Germany, said it was up to the Cypriot government to come up with an alternative but it was fair to expect those with savings over 100,000 euros - the normal limit for state deposit insurance - to contribute to a bailout.

The EU has a track record of pressing smaller countries to vote again until they achieve the desired outcome. And there was evidence the bank closure was slowing trade. Several gas stations were refusing credit cards, insisting on payment in cash.

While taxing even small savers was politically explosive, the Cypriot government had balked at sparing them by imposing a higher tax on big depositors - fearing for an offshore banking business that accounts for a big share of its economy. Meanwhile, European officials were growing increasingly exasperated. At the same time, the idea of bankruptcy for a member of the euro zone, however small, raises fears for confidence in the currency.