Market In-Review – Pulling A Switzerland! Swiss National Bank Departure From EURCHF Pegging Unleashes Chaos In Markets

 

■ Swiss National Bank departure from EURCHF pegging unleashes chaos in markets
■ Euro weakens vs. major currencies    
■ E.U. equities gain in expectation for ECB purchase program
■ Oil prices manage to squeeze gain after seventh weekly loss

The Swiss National Bank (SNB) made a surprise move, last Thursday, as it announced the abandoning of the 1.2 "Floor" at EURCHF and decreased interest rates on deposits from -0.25% to -0.75%. The decrease of rates, however, was no match for the abandoning of the floor, seeing EURCHF falling over 30 figures, after the announcement, and concluding the day with a nearly 19% loss! No longer expecting purchases by the SNB, markets depreciated the EUR vs. major currencies. The USD quickly gained more than a percentage point vs. the EUR, sending the pair to hover around 1.16 – the lowest rate in over a decade. The JPY surged by approx. 2.3% vs. the EUR.

Alternatively, gold positioned itself as a safe alternative, adding more than 4% vs. the Euro, and 2.8% vs. the USD, during the day. More side effects for the tsunami were seen in sovereign bond yields. The German 10 year sovereign bond yield lost about 2bp during the day, ending at a little less than 0.48%. U.S. 10 year yields, playing a role as a safer haven, lost no less than 17bp, to its lowest in nearly two years! Alternatively, fearing of the implication a stronger CHF would have on local exporters, the Swiss market index slid 8.7% during the day.

A few hours after the announcement SNB Governing Board Chairman Thomas Jordan held a press conference, aimed at explaining the rationale for the decision. He stated that the minimum exchange rate policy was instated "during a period of exceptional overvaluation of the Swiss franc and an extremely high level of uncertainty on the financial markets". The CHF was also said to still be high, but with an overvaluation that has "decreased as a whole". Additionally, the economy was said to be able to take advantage of the phase to adjust to the new situation.

With all due respect to the economy's adjustment phase, Jordan's remarks still didn't satisfy investors' minds. Namely the question of why didn't the SNB provide some preliminary indications that it was about to make the move. On Saturday, Jordan gave an interview to Swiss daily Neue Zürcher Zeitung, providing further details. He supported the legitimacy of the move, claiming it was backed by all governing board members. Defending the manner in which it was played, he added that preliminary indications would have "opened the door for speculators". In hope of seeing some depreciation of the CHF, Jordan added that negative rates on deposits should have a strong effect over time.

Global economy passes the Swiss stress test

The fact that all hell didn't break loose on Thursday, volatile trading was seen as rather good news. Friday's session saw the S&P500 (SPX) gain approx. 1.3%, which helped it recover some of the beginning of the week's losses. Fueled by expectations for the ECB introducing monetary measures next week, the DAX added 1.3% on Friday, which, augmenting gains at the start of the week concluded to a 5.4% gain. Similarly, the CAC 40 added 4.8% throughout the week.

Some investors were more concerned than others on Friday, seeing a 1.4% gain of gold prices conclude a 4.7% weekly surge. The U.S. 10 year yield, on the other hand bounced back, finishing the week at 1.84%. Although trading negative through most of the week, oil prices rallied on Friday to conclude a 0.7% weekly gain, which, after seven consecutive weekly losses, is quite an achievement.