Finally, the catalyst markets have been waiting for. For weeks we have been wondering what might pull US markets back from their current - and significant - milestones of resistance. While key indices have breached pre-GFC levels and buying activity has continued on the back of excessively bullish consumer demand, one could not escape the uncomfortable feeling that "maybe markets have gone too far, too fast".

And right on cue, that catalyst arrived, straight from the belly of Eurozone debt fears, triggering a worldwide pull-back.

The citizens of the small island of Cyprus woke to a daunting possibility this week, reminiscent of the 1991 attempt to freeze assets in the Soviet Union. Cypriot banks were forced to close and will remain so until Tuesday. Everyone is wondering what will happen. Eurozone administrators proposed a plan to ‘tax’ all deposits, which was subsequently rejected by the legislature. This would have enabled Cyprus to receive a bailout of sorts, although a ‘bail in’ could be a better description. The proposed €10 billion bailout (much smaller than packages put together for the likes of Greece and Ireland), consists of a combination of bailout funds and a controversial small investor levy.

Praised by the Germans and other outlying yet dependable Eurozone nations, the package planned to impose a 6.9% penalty on deposits below €100,000 and 9.9% for higher balances. Some outsiders believe that a more palatable package would be to exempt smaller account holders and impose a 15.6% penalty on larger accounts. Cyprus’s banks fear a run on deposits as parliament works towards a solution to present to the IMF. The levy would comprise some 5.8 billion of the €10 billion package. The remaining funds would come from a mixture of ‘bail-in’ bonds and privatisation measures. Either way, the Cyprus emergency raises the question: What other debt-laden nations face a similar fate?

America has managed to keep a lid on its debt woes thus far, as has the UK, while Ireland is performing surprisingly well. Still, trouble in the Eurozone does little to spur confidence on international markets and news of the Cyprus problem sent nearly all Euro and North American markets into retreat.

Was Cyprus the inevitable catalyst?
Markets were overdue for a pull-back and Cyprus just happened to be the trigger. The Dow has fully eradicated its sub-prime losses but inherent risks remain. Stocks have run so hard that investors were waiting for an excuse to sell. The actual financial performance of Cyprus is merely a stone chip on the bumper of the semi-trailers that are the world, US and European economies. Nevertheless, confidence has been battered and €10 billion is clearly not enough to rid the small nation of its near-term woes. Volatility will likely continue as investors wonder who will be the next pillar to fall and whether contagion will once again grip the struggling European economy.

Stay Tuned,
Lachlan McPherson