Stocks Dinged on Fitful Outlook for Eurozone
NEW YORK ( TheStreet) -- U.S. stocks fell Monday, reversing morning gains, on concern the painful bailout measures forced on Cyprus's citizens and Russian depositors has set a troubling precedence for other troubled Eurozone nations, most notably Italy and Spain.
"While the Cypriot banking package has averted imminent disaster, the episode will have damaging effects on Cyprus's economy and has raised new questions over the stability of the currency union," said Jonathan Loynes, chief European economist at Capital Economics in London in a note.
The S&P 500 fell 0.33% to 1,551.69 after gaining as much as 0.52%.
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The Dow Jones Industrial Average finished lower by 0.44% to 14,447.75 while the Nasdaq dropped 0.3% to 3,235.30.
European markets turned lower as safe-haven assets attracted buyers. The FTSE 100 in London fell 0.22% and the DAX in Germany declined 0.51%.
The benchmark 10-year Treasury was advancing by 2/32, lowering the yield to 1.923%. The dollar was popping 0.62%, according to the U.S. dollar index.
May crude oil futures settled up $1.10 to $94.81 on the New York Mercantile Exchange.
The Cypriot government in negotiations with the International Monetary Fund, the European Commission and the European Central Bank agreed to the deal that will raise €10 billion to recapitalize the country's ailing banks.
The deal will require massive cuts to Cyprus' banking sector which has ballooned from billions of dollars funneled from Russian depositors. To appease local Cypriots, the agreement spares smaller bank depositors, those with under €100,000, from financial losses. A tax will be levied on deposits above €100,000.
Cyprus' second-largest bank, Popular Bank of Cyprus, commonly known as Laiki Bank, will be shuttered, while the country's largest lender, the Bank of Cyprus, will undergo significant restructuring, culminating in losses for both junior and senior bondholders.
Gareth Berry, a currency strategist at UBS AG in Singapore warned that when most banks in Cyprus re-open on Tuesday, withdrawals are likely to surge, reflecting the locals' lack of confidence in the "sanctity of deposits" of its allegedly fortified banks. The decision to seize deposits "isn't likely to be quickly forgotten" anytime soon, he said.
Barry also made note of the dire, long-term economic consequences of the deal: a large portion of Cyprus' €68 billion deposit base will be wiped out or frozen in the process, and therefore won't be available to contribute to economic activity, leading to sharp declines in the country's GDP.