Risk assets were mostly stronger through to mid-March reflecting greater optimism about global growth prospects. From mid-month the rally in risk assets was challenged by rising uncertainty. Europe’s economic difficulties came back sharply into focus with the bail-out package negotiated for Cyprus. In economic terms Cyprus is tiny, representing well under 1% of EU GDP, but the bail-out plan requiring for the first time some bank depositors to pay a special levy and share the cost of adjustment raised the possibility that a similar plan might be extended to other euro-area economies that might need assistance. Cyprus is a special case because its banking deposits are unusually large, almost eight times the size of its economy, but the point that the bail out for Cyprus is likely unique was compromised as some European politicians implied that it might represent a template for future bail out plans.

Heightened Europe concerns impacted hurt risk markets the most in economies where economic growth prospects are subject to some uncertainty. In the US, where economic indicators showed mostly broad-based improvement through March, the S&P 500 rose by 3.6% in the month rising to a record high late in the month moving above the previous record set back in 2007. In Japan, the sharemarket was even stronger than in the US with the Nikkei rising by 7.3% in March, assisted by very pro-growth government policies including the installment of a new governor of the Bank of Japan (BoJ) seen as being much more likely to ease policy by aggressive expansion of the BoJ’s balance sheet.

In contrast, European sharemarkets after a strong start to the month finished the month down. The Australian sharemarket came into this category too, showing good gains until mid-month before falling sharply in the second half. The ASX 200 fell by 2.7% in March hurt by doubts about Chinese growth prospects, indications that the RBA might have finished its rate cutting cycle and some home-grown political uncertainty after an abortive government leadership spill. Despite the uncertainty, signs of improving domestic spending showed in much stronger January retail sales, up 0.9%, with the promise of more to come with March Westpac-Melbourne Institute consumer sentiment rising 2% and building on a 7.7% gain in February. Employment also rose unexpectedly strongly in March by 71,500, the biggest monthly gain in 13 years.

Like the Australian sharemarket, Australian credit rallied mostly through to mid-month before deteriorating through the second half in the wake of the Cyprus bail out. Looking ahead, Australian economic indicators are likely to firm mostly over the coming month. In particular, we see housing finance lifting sharply in the wake of several weeks of very strong residential auction sales. The improving economy should help to offset the uncertainty that beset risk markets in the second half of March, but it also implies that interest rates are at their low point for the current cycle. Low inflation provides the RBA with the leeway to leave the cash rate unchanged for several months to come and we still pencil in the first 25bp rate hike to 3.25% early in 2014.