Swiss move shocks markets

While European equities continued to rally, the real story was in the FX space where the move made by the Swiss National Bank (SNB) surprised global markets.

Source: Bloomberg

Coming to the close of Asia trade yesterday, markets were actually looking quite positive and this extended to European markets where investors continued to focus on optimism ahead of next week’s ECB meeting and expectations of stimulus. However, this all changed when the SNB removed the peg on EUR/CHF, which was at 1.20.

This resulted in significant Swiss franc strength, with EUR/CHF dropping well below parity. Additionally there was a 50 basis-point cut in interest rates just to add to the confusion in a bid to counter some of the CHF strength.

The reasoning behind it was that the peg had been introduced to fight ‘overvaluation’ of the CHF, but the SNB feels this has now largely been reduced. The SNB added that the economy has managed to take advantage of this to adjust to the new situation. The timing is very interesting though considering the ECB is expected to announce QE as early as next week. This implies the SNB has indirectly told markets that QE is on the way.

Some analysts feel this is the SNB simply preparing for the likely inflows from a broad-based asset purchase program. The sell-off in Swiss equities was also relentless with the market there dropping 9%. Essentially a stronger currency is negative for economic growth and not even the 50 basis-point rate cut could mitigate this. Having said that, I doubt this is the last we’ve seen of the SNB intervening and I suspect more volatility is on the way in this period of re-adjusting.  

ECB quantitative easing on the way?

EUR/USD also dropped on the move, falling to around 1.1619 as volatility in FX markets hit the roof. Many traders would have been caught out by the move and we are probably in for a period of re-adjustment in FX markets.

The ECB was effectively given the green light from the European Court of Justice to announce a quantitative easing (QE) program at its next central bank meeting on 22 January (QE is the expansion of base money/printing money and buying government bonds in the secondary market). With a balance sheet of 85% of GDP, the SNB simply cannot keep sitting on the bid buying EURs forever; it simply isn’t going to end well! The EUR will continue weakening and in my opinion the ECB will keep increasing the size of their asset purchases throughout 2015. Therefore the SNB would be swimming against a tide that is becoming more and more powerful.

Gold and oil stocks in focus

Ahead of the local market open, we are calling the ASX 200 down 0.2% at 5319. US earnings have been showing signs of strain for some of the financial heavyweights, as trading conditions tightened. This will be a concern for some of the listed investment groups in the domestic market.

While the main theme in the ASX 200 recently has been pinned on resources and related stocks, financials and related firms with exposure to FX transactions will be in focus today as investors decipher just how exposed some firms were to the surprise overnight moves. Crude oil was showing signs of a recovery in Asia yesterday, but once again this was short-lived as OPEC reduced its forecast for demand, resulting in renewed weakness for oil. The demand/supply dynamics for this market have not changed and investors should be warned of prematurely calling a bottom. This could see energy stocks give up some of the gains they made yesterday.

Gold stocks will be the space to watch for gains after a big move in the precious metal following the Swiss move. Copper also found some stability yesterday and this could prompt a near-term recovery for the likes of OZL and PNA.

IGA, may distribute information/research produced by its respective foreign marketing partners within the IG Group of companies pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the research is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, IGA accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact IGA at 6390 5118 for matters arising from, or in connection with the information distributed.

This information/research prepared by IGA or IGA Group is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to trade, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. In addition to the disclaimer above, the information does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. Any views and opinions expressed may be changed without an update.

See important Research Disclaimer.