Global markets fall on Cyprus bailout concern

While gold firm up as investors exit risky assets

Global financial markets fell on Monday after an unprecedented move to bail out Cyprus' banking system brought worries about the Euro zone's debt crisis back to the fore. Stocks, euro and commodities fell, while gold firmed up as investors exited risky assets, such as emerging market equities and moved to safe investments such as gold.

India's benchmark indices fell 0.7 per cent, but the decline was modest compared to other Asian markets with investors holding back from selling aggressively ahead of the Reserve Bank of India's (RBI) rate-setting meeting tomorrow. The MSCI Asia apex 50 declined almost two per cent.

Cyprus, through which offshore investments are routed because of its low-tax regime, proposed a one-time tax on the country's bank depositors to cut the costs of the bailout. (MARKETS GET THE SHIVERS)

"The news on Cyprus needing to be bailed out and resorting to taxation on deposits for funding the bailout is negative for market sentiment," said Gautam Sinha Roy, vice-president (equities), Motilal Oswal Securities. "This tax also sets a dangerous precedent for countries needing to be bailed out, especially in the Euro zone. This is again beginning to make sentiments negative in global markets."

Receding concerns about Europe have been a major support for Asian stocks and currencies in recent months.

The MSCI Euro Index fell 1.5 per cent, while the euro fell to a 14-month low today, following the Cyprus turmoil.

Copper led the base metals' fall on the London Metal Exchange (LME). Also supported by a 3.4 per cent fresh addition in inventory, the red metal fell 2.25 per cent to touch an intra-day low of $7,545.75 a tonne and hovered around $7,594 in late afternoon trade. Other metals also followed suit.

Investor sentiment weakened after a ^1.62-billion trade deficit announced by Italy for January as against a surplus of ^2.11 billion a month ago. European trade balance was at a surplus of ^9 billion in January from a surplus of ^10.3 billion in December 2012.

"The base metals pack traded on a negative note on the back of rise in risk aversion in the global market sentiments coupled with strength in the DX. Additionally, rise in LME inventories, apart from lead, exerted downside pressure on prices," said Vedika Narvekar, senior research analyst with Angel Commodities.

The risk aversion triggered a rally in gold prices. The yellow metal shot up 0.6 per cent and hit the intra-day high of $1,608.30 an ounce (oz), a level not seen since February 25. However, strengthening dollar capped gold's upward movement resulting in the bullion slipping to trade at $1,601.5 an oz. Silver also moved lower in similar fashion to trade at $28.77 an oz.

Spot gold in Mumbai's Zaveri Bazaar closed with a gain of Rs 215 to Rs 29,595 per 10 gm. Although silver gained a marginal Rs 105 to Rs 54,735 a kg on Monday, it failed to follow the surge in bullion prices due to weakening sentiment in global industrial activity. The US dollar strengthened against the rupee to close at 54.18 on Monday against the level of 54.03 on Friday.