Why Cyprus changes everything

Just when you thought it was safe to go back into the market, a shark has been found swimming off the Cyprus coast.

To be more precise, the decision of the Cypriot government to levy a tax on local bank deposits has reminded investors of the delicate state of Europe’s finances.

The government proposed the levy as part of a €10 billion bailout for the debt-laden island, agreed with the European Union. It runs counter to the belief that savers have been, and will be, protected in exercises like these. It is not remotely fair to penalise savers in this way, even if several of them happen to be Russian oligarchs trying to shelter their tax burden. And fears are growing savers will take a hit elsewhere.

They almost certainly will not. And the Cypriot levy is being renegotiated. But the damage has been done. Stock markets were quick to take a hit, after being boosted by central banks printing money as part of a global refinancing exercise for several months.

The Cypriot levy could not have been worse timed, on the back of evidence that investors were starting to take a positive view on equities and high-yield bonds, which need a stable economy to perform. The squeezing of hedge fund short positions has added to this year's momentum, along with a clutch of successful share placings.

Bombed-out stocks have enjoyed a sea change in their fortunes. For example, Ocado, the UK-listed online grocery delivery company, was thought to be facing financial problems three months ago as it fought to finish an expensive new distribution centre. Investors were unimpressed with talk that it might sign new deals, fearing this would upset its existing relationship with Waitrose.

Since then, its shares have nearly doubled following the opening of the distribution centre, higher client demand and formal talks with Morrisons. Former Marks & Spencer chief executive Sir Stuart Rose has become chairman, and investors have swallowed statements that Waitrose is relaxed.

Shares in travel agent Thomas Cook have nearly trebled since the start of the year, now people have decided it is safe to start booking holidays through them. Chief executive Harriet Green was parachuted into the group last July, following a bailout. She confesses she found the going tough at the outset. Now she says the brand will prosper.

Finnish nickel-producer Talvivaara Mining is still finding the going pretty tough. But improved stock market sentiment helped it to underwrite a six for one rights issue to raise €260 million last week. Its shares shot up 70% when it unveiled the refinancing, as the shorts ran for cover.

Recovery stories like these took a knock on the back of last week’s news from Cyprus. But the event has also reminded governments and central banks it is way too early to remove the stimulus that has powered stock markets this year.

In a newly published research note, securities house Morgan Stanley argued stock picking will remain an easier way to make money than macro trading.

On balance, it should be fine for investors to stay in the stock market for a while yet. But the water doesn’t look quite as tempting as it did last week.