World week ahead: Cyprus threat ahead

A much-maligned weekend deal to rescue Cyprus from financial collapse appears set to unravel within days and could renew concerns about the eurozone and its continuing debt crisis.

Whether that flows across the Atlantic and dampens enthusiasm on Wall Street is to be seen.

For their part, US investors will be focusing on a two-day meeting this week by the Federal Reserve and
a slew of housing data for a fresh catalyst to extend the year-to-date rally on Wall Street which slowed somewhat in the last five days.

In the past week, the Dow Jones Industrial Average rose 0.8 percent, while the Standard & Poor's 500 Index advanced 0.6 percent and the Nasdaq Composite Index gained 0.15 percent.

On Thursday, the S&P 500 came within a whisker of its record high of high of 1565.15 reached in October 2007, and it closed on Friday at 1560.70.

"There's no sign of the euphoria that marks the end of a bull market," Ken Fisher, who oversees $US46 billion at Fisher Investments in Woodside, California, told Reuters.

So far this year, the Dow has rallied 10.8 percent, the S&P 500 is up 9.4 percent and the Nasdaq has gained 7.6 percent.

Reports due in the coming days will provide clues on whether the housing sector is sustaining its recovery. The housing market index is overnight, followed by housing starts on Tuesday and the FHFA house price index and existing home sales on Thursday.

"There’s progress [in housing] and it looks to be sustainable," Sean Incremona, senior economist at 4Cast Inc in New York told Bloomberg. "Cheap financing is definitely helping. We can thank the Fed for that."

Policymakers at the Fed are expected to affirm their current stance and current pace of asset purchases, despite recent comments suggesting a less aggressive approach is in order, as well as an increase in expectations that the central bank may start to take its foot off the stimulus accelerator sooner than most bets.

Fed chairman Ben Bernanke will host a news conference after the policy statement is released on Wednesday. He likely will be pressed on weekend comments by Dallas Fed president Richard Fisher that "too big to fail" banks should be broken up because of their threat to the financial system and to competition.

In Europe, the fallout from Saturday's deal to bail out Cyprus appears set to roil the markets. The crux of the issue is the imposition of a tax on depositors in Cyprus banks, a de-facto haircut for those who had put their faith in previous statements that they wouldn't have to bear responsibility for the bad decisions made by the banks.

Lawmakers in Cyprus are expected to vote on the Brussels negotiated deal tonight and the new government may not have the votes to secure its future. Failure to approve the bailout could lead to the collapse of the country's two biggest banks, the government has warned, and that could refresh concerns for the eurozone as a whole.

Europe's benchmark Stoxx 600 Index climbed 0.7 percent in the past five days.

(BusinessDesk)