Financial Markets… The euro rose and European shares pared some of losses after Cyprus agreed to spin off the Greek units of Cypriot banks, raising hopes that the nation is moving closer to an agreement to stave off financial meltdown. The 17-nation currency climbed 0.4% versus the dollar to $1.2956, while the European currency rose 0.3% against the yen to 122.73. European stocks were little changed with the benchmark Stoxx 600 index sliding 0.1%, headed for a weekly loss of 1.1%.
Italian and Spanish government debt extended their gains on Friday amid speculation among some investors that the risk of Cyprus contagion to other the euro-zone countries is limited. Italy’s 10-year bond yields slid 7 basis points to 4.52%, gearing for a weekly decline of 8 bps, while comparable Spanish yields fell 4 bps to 4.83%, after dropping 16 bps over the previous two days.
Developing-country stocks slid to a three-month low today, with the benchmark MSCI Emerging Market Index climbing 0.6% to 1,016.06, as Thailand stocks tumbled the most since October 2011. Weaker-than-estimated quarterly earnings reports from major companies also weighted negatively on stocks. The MSCI index has declined 2.5% this week, set for its biggest weekly decline since May. Thailand’s SET Index slumped 3.2%, the steepest decline among developing-country benchmark stock indexes, after the country’s bourse said it may increase margin requirements on equity trading.
High-income Economies…Germany's business confidence deteriorated in March after hitting a 10-month high in the previous month. The IFO headline business climate index dropped to 106.7 in March from 107.4 in February. The decline follows on the heels of PMI surveys which show a similar deterioration in business expectations.
In Cyprus, two days of crisis talks between the Cypriot and Russian government over possible financial assistance have ended with no agreement. Cyprus is therefore back to negotiating with the EU over the bail-out plan proposed last week. It has until Monday to reach agreement before the ECB cuts liquidity assistance to Cypriot banks, essentially forcing an exit from the euro zone. Three Greek banks meanwhile have agreed to buy Cypriot branches in Greece, helping shield the Greek banking sector from the fallout of the island’s crisis and allowing Cyprus to shrink its bloated banking sector.
In the US, the Philadelphia Fed diffusion index of manufacturing rose to +2 in March from -12.5 in February, indicating an increase in regional manufacturing activity.
Developing Economies…Latin America and the Caribbean: Brazil’s current account (CA) deficit, which amounted to $6.6 billion in February, exceeded FDI inflows worth $3.8 billion for the fourth month in a row. The CA deficit deteriorated given the increasing trade deficit which counted billions of dollars of fuel imports from 2012 in this year's balance.
Middle East and North Africa: Egypt's central bank raised its interest rates by 50 basis points, taking the overnight deposit rate to 9.75% and the overnight lending rate to 10.75% in an attempt to curb rising inflation and to support the weakening Egyptian pound. The pound has lost 9% of its value against the dollar since the start of the year while inflation is up to 8.2% (y/y) in February from 6.3% in January.
Sub-Saharan Africa: Nigeria’s inflation accelerated in February to 9.5% (y/y), up from 9.0% (y/y) in January. Food was a main driver of upward price pressures, as domestic supplies were still short after last year's flood damage and a slightly weaker currency translated into higher food import costs. Core inflation rate, which excludes the volatile components of food and fuel, edged down to 11.2% in February from 11.3% in the previous month. Headline inflation remains within the central bank’s 10% target.