Week End Blog – A Swiss Earthquake!

· by · in FINANCIAL MARKETS, MACRO. ·

This already wasn’t the smoothest of starts of the year, but the Swiss Central Bank decided to make things really interesting. In quite a surprise move (there were some rumors around) the SNB dropped the 1.20 cap of the Swiss franc against the euro. What happened was just ‘major’. Within minutes the franc strengthened by 30% against the euro, before settling around parity.

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In order to counteract the impact of the cancellation of the euro cap, the SNB lowered short-term interest rates by 0.50%. I doubt if that had the desired effect, but it did push an even bigger part of the Swiss yield curve into negative territory. You now have to pay a penalty for owning Swiss francs up to a maturity of 10 year.

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The SNB move did cause some serious damage, however. The chart below shows that Swiss companies, which realize most of their earnings abroad, got hammered. Since the cap was removed, the Swiss Market Index is down 13%. Thank you so much!

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And that will probably not be the end of it. Bloomberg posted an insightful overview were some of the CHF exposures are concentrated. Austrian banks, Greek banks, Polish mortgages, and so on. And this excludes the French local governments, which had to reveal they too have some CHF loans of their own.

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For FXCM, a US listed company offering online foreign exchange trading services, things got even worse. Trading got suspended and a default could be reality soon. I guess Mr. Jordan did not anticipate this kind of fallout, or did he?

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Turning to inflation data. This week the UK and US showed there is no escape to the oil price collapse. In the UK, the inflation rate fell to the lowest in 15 years, forcing Mr. Carney to write his first official letter on why CPI levels are so low. It probably won’t be his last.

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In the US, consumer prices fell the most in six years in December. And, while the YoY number came in slightly higher than expected, 0.8%, inflation is surely below comfortable levels. The Fed’s dilemma gets bigger and bigger as the unemployment rate continues to fall. What to do?

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Of course, yields went lower again this week. Falling bond yields have become an almost inherent part of the Week End Blog. The US 10-year Treasury yield fell to almost 1.70% this week, compared to 2.17% at the beginning of this year. Which, in case you missed it, was just two weeks ago.

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Even more impressive is the chart showing the average 10-year bond yield of the big three, Germany, Japan and the US. That average yield equals around 0.80%. An impressive chart indeed.

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Meanwhile, shorter US interest rates show that markets are pushing out the first rate hike by the Fed. While FOMC members are openly arguing about what is the most appropriate monetary policy going forward, the markets now thinks the Fed will take things easy. And with Yellen at the helm of the Fed, who can blame them?

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And then there is the upcoming QE program by the ECB. The expectations surrounding it are getting bigger and bigger. European equities rallied on Thursday, right after the SNB dropped the euro cap, explaining the move as ‘evidence’ the ECB will go for a large easing scheme! Also, the euro has diverged from the trend in short-term bond yields, which now suggest a much stronger euro.

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For the first time in weeks, oil did not fall. Crude oil crept up a couple of dollars. Interestingly, for a brief moment, the prices of Crude and Brent were the same. This had not occurred since the middle of 2013.

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Oil is not the only commodity that has come down. In recent days others, predominantly copper, got crushed as well. With hindsight it’s fair to say that the peak of the commodity supercycle was already back in 2008, exactly the time when people started talking about that same supercycle.

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At least one thing has become clearer in recent weeks. Volatility has increased. There are many issues going on with very unknown outcomes. Oil prices, Russia, Greek elections, global growth expectations and low, or even negative, inflation rates. Higher volatility could linger for a while.

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Finally, bitcoin makes the Week End Blog once again. This week its price collapsed after another bitcoin exchange, Bitstamp, reported that bitcoins were stolen. Although still an interesting technology, bitcoin has transformed in a rather miserable investment. Bitcoin’s value fell below USD 200 this week. At least transaction numbers are still increasing…

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Thank you for reading the Week End Blog. If you have any remarks or questions please contact me (@jsblokland).

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