The European Union’s announcement that it will include a tax on bank deposits as part of its bailout of the Cyprus government was certainly a surprising development that got investors’ attention this week. As we talked about in Monday’s High Octane Trader update, Wall Street isn’t concerned so much about the particular tax on Cyprus because it’s a small country. The big concern is whether the EU has set a precedent with the tax and whether it could be levied elsewhere. That leaves open the potential for unrest in bigger countries like Spain and Italy.

I was encouraged that we didn’t see heavy bank withdrawals in those nations, and the euro currency has stayed relatively stable, which is also a good sign. Yields on Spain’s 10-year debt did rise to around 5%, but that’s still well below the 7% and higher we’ve seen when fear is at its highest.

There was another interesting development today when the Cyprus parliament rejected the bailout plan that would have included the tax deposits. The market appeared encouraged by this because of what we just talked about – it may lessen the likelihood that taxes could be imposed on other countries. Still, the situation remains very uncertain and is one we’ll have to watch closely.

All in all, investors have generally learned to live with the European debt crisis. I do think it has the potential to contribute to increased volatility in the second quarter, but as of now, the situation there hasn’t changed my expectations for the global economy or the stock market.