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Prospects Daily: Euro weakens on Cyprus bailout plan, US consumer and homebuilder confidence weakens, Russia’s IP contracts further

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Financial Markets…European financial markets tumbled on Monday, with the benchmark stocks indices in all of the 18 Western European markets sliding, the euro weakening the most in 14 months versus the dollar, and borrowing costs for Italy and Spain jumping, after a proposed bailout plan for Cyprus that will tax bank deposits prompted investor jitters. Bank shares were especially hit hard after Moody’s Investors Service warned that the Cyprus bank levy will have negative implications for the ratings of the region’s other lenders.

The euro fell as much as 1.5% against the dollar in early trading, the biggest drop since January 2012, and the 17-nation currency slid to as low as 121.15 yen, the lowest since March 5. Meanwhile, 10-year yields on Italian and Spanish government bonds widened by 11 basis points to 4.27% and 15 bps to 5.08%, respectively.

Developing-country stocks tumbled, with the benchmark MSCI Emerging Market Index losing 1.1% to a three-month low, after the Cyprus bailout plan renewed concerns about the euro-zone financial turmoil. Russia’s Micex Index dropped 2.4%, gearing for the biggest decline in four months, and China’s Shanghai Composite Index slid 1.7% to the lowest level since December 28. Meanwhile, the risk premium investors demand to buy developing country debt over U.S. Treasuries rose to a four-month high of 296 bps.

High-income EconomiesEurozone exports contracted at a slower pace in January of 5.2% (3m/3m saar) after a 6.3% fall in December, helped by a 2% (m/m sa) gain in January. Imports registered a 9.1% (3m/3m saar) fall, an acceleration from the 8.4% decline the previous month, despite rebounding by 3.1% (m/m sa) in January.  Italy’s exports contracted at a slower pace in January, by 0.7% (3m/3m saar) following a 2.2% drop in December, supported by rising shipments to non-EU countries (up 7.8%). Imports fell by 9.5%, a slight improvement from the 10.2% drop in December.

Separately, a BIS report showed a significant shift in cross-border lending out of the Eurozone towards the UK and US in Q3 last year. Lending in advanced economies rose 0.5% (q/q), the first increase in 3 quarters, but the increase masked a gain in credit to non-banks in the US (up 3.8% q/q) and banks in the UK (up 3.4%) that was partially offset by declines in claims on banks in the Eurozone (down 2.8%).

In the US, the University of Michigan consumer sentiment index fell for the first time in 3 months to 71.8 in March vs. a February reading of 77.6. This was its lowest level since December 2012 and reflected deteriorating economic expectations. Separately, the NAHB index of homebuilder confidence fell further off the 6-year high set in December to 44 in March, down from 46 in February. The decline was led by supply bottlenecks and rising construction costs that have dampened current sentiment.

Developing EconomiesEurope and Central Asia: Russia’s industrial production dropped 2.1% (y/y) after a 0.8 (y/y) contraction in January, led by declines in mining and energy utilities. This is the largest y/y contraction in more than three years.

Latin America and the Caribbean:
Chile’s growth accelerated in the 2012Q4, to 6.1% (q/q, annualized), up from 5.7% (q/q, annualized) in the previous quarter driven by expanding domestic demand. Growth for the entire year came in at 5.7%, up from 5.1% in 2011.

South Asia:
Sri Lanka’s growth accelerated in 2012Q4 to 6.3% (y/y) compared to 4.8% (y/y) in the previous quarter as domestic demand helped offset a slump in exports. Growth for the entire year came in at 6.3%, down from 8.3% in 2011.

Sub-Saharan Africa: Tanzania’s inflation eased to 10.3% (y/y) in February 2013 from 10.9% (y/y) in the previous month on the back of easing food and non-alcoholic beverage prices. The central bank’s target is to achieve single-digit inflation by the end of the current fiscal year, ending in June.

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