UBS and Credit Suisse are dragging the SMI and the Swiss economy down

Earning analysis
Earning analysis (Bloomberg)

Yesterday, the SMI broke under the January 15th level and continues lower today as one of the worst performing index in Europe. While global market distress is the main reason behind the move, there are also some local reasons which explain the recent underperformance.

Clearly the earning results so far have not being glorious. Both health care and luxury under-delivered, but the biggest disappointment clearly came from the two major banks Credit Suisse and UBS.

Both banks are facing difficult conditions that are likely to remain throughout the year. The end of the banking secrecy and the negative interest rate are weighting on margins and ROIs (return on investment). Moreover these banks are also deleveraging, challenged by higher capital requirements.

While Swiss banks weight a lot less today within the SMI Index (CS currently trades at its lowest level since 1991!!!), their importance on the Swiss economy is all but diminished. With balance sheets about 3x Swiss GDP, the “too big to fail” risk is among the highest in the world.

Additionally, with salaries and bonuses being largely reduced, and the upcoming lay-offs, the banking sector will do little to support an already fragile economy. Unemployment reached 3.8%, the highest since 2010 and consumer spending has been on a negative trend ever since the EUR/CHF floor was dropped (except for July). This is the worst series of negative growth since this number was tracked in 2003.

After having broken below the important support zone b/w 7900 – 8000, the next level to look for is around 7000, which represent a 50% retracement of the entire bullish rally from the August 2011 bottom to the July 2015 top.

SMI weekly chart
SMI weekly chart

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