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LONDON (Reuters) - European shares, the euro and oil rose, while safe-haven German government bonds and gold fell on Monday, after Cyprus agreed a bailout to save its banking system and keep it in the euro.
In the early hours of Monday morning Cypriot policy-makers reached a deal with the European Union, the European Central Bank and the International Monetary Fund to shut down its second largest bank and inflict heavy losses on uninsured depositors, including wealthy Russians, in return for a 10 billion euro ($13 billion).
Without the agreement the ECB said it would have cut off emergency funds to the banks, a move that would have triggered a meltdown of Cyprus's banking system and potentially pushed the country out of the euro currency bloc.
Investors breathed a sigh of relief that although the move to seize individuals' savings had introduced a new dimension to the euro zone crisis, the problems had not been allowed to escalate further.
Euro zone banking shares .SX7E rallied as much as 2.4 percent at one point to lead a rally on global stock markets that reached as far as Australia.
By 7:15 a.m. EDT Europe's top shares .FTEU3 were up just under 1 percent and had recouped most of last week's losses that were due to concerns Cyprus's problems could impact other struggling euro members.
In the region's crisis-sensitive bond markets, the price of German 10-year Bunds, which moves down as yields go up, also fell as the deal brought relief to riskier assets.
"No one really wants to be seen as dropping a country out of the euro zone. That's the signal from this deal," said Elwin de Groot, senior market economist at Rabobank.
Ten-year Spanish government bond yields fell 4.1 basis points to 4.83 percent and the Italian equivalent eased 5.3 bps to 4.47 percent, while gold a traditional safe-haven similar to German Bunds, dropped to a 1-week low of $1,602 an ounce.
The Cyprus deal, however, was unlike previous peripheral euro zone country bailouts, which have protected bank deposits.
The worry now for investors is that the decision to hit savings will see individuals in other debt-strained countries take the precautionary step of pulling money of their own banks, starving them of already scarce funding.
The euro has largely held its ground during the turmoil in Cyprus, it bounced back above $1.30 following the deal although the momentum was waning as midday approached in Europe.
"A deal to avoid default was expected. But this sets a dangerous precedent for the euro zone," said Peter Kinsella, currency strategist at Commerzbank, who expects the euro to weaken against the dollar.
"It is very worrying that expropriation of private sector capital is taking place. It increases the risk of a bank run and when it next happens it is unlikely that ECB policies of (providing) back stop will work then."
Some equity market traders also said they expected risk premiums, which had been falling before the situation in Cyprus flared up, to rise again.
"I am wondering whether this slightly more moderate response by the market is a reflection of the fact the trust (in euro zone policy makers) is now gone," said Justin Haque, a broker at Hobart Capital Markets, though he expected equity markets to keep rising into the extended Easter bank holiday break.
"This week is a short week and the end of the quarter, so there is going to be a massive amount of window dressing," he said.
The immediate reaction from most markets, however, was relief that the euro zone had managed to douse the flames of the latest fire to threaten the region's financial system.
Wall Street was expected to follow Europe and open higher having been little changed last week. By 1115 GMT futures for the S&P 500, Dow Jones and Nasdaq 100 were up 0.3, 0.4, 0.6 percent respectively.
In the currency market, the dollar .DXY, was 0.5 percent lower against a basket of major currencies, while the yen, which tends to rise in times of financial market stress, retreated broadly as the worries over Cyprus eased.
Market expectations that the Bank of Japan will unveil aggressive monetary stimulus at its next policy meeting on April 3-4, the first under new BOJ Governor Haruhiko Kuroda, are also expected to support the dollar against the yen in the near term.
Oil also joined in the rally in risk assets. Brent crude rose 70 cents to above $108 as hopes that the avoidance of more severe outcome in Cyprus could brighten the outlook for a revival in demand.
"This is certainly very good for risk appetite overall and that's going to have a positive impact across oil markets, so we should see some positive sentiment reverberate through energy markets overall, for at least the next 24 to 48 hours," said Ben le Brun, an analyst at OptionsXpress in Sydney.
Editing by Will Waterman and Anna Willard