As if it weren’t enough since the beginning of the year, the Swiss National Bank (SNB) surprised the entire financial community yesterday by abolishing the Swiss franc’s peg against the euro at 1.20, and lowering its key interest rate to -0.75%.
This came as a shock to pretty much any living and breathing Swiss person, given that for international investors, it certainly wasn’t the same tune. This makes the timing of the SNB’s announcement rather astonishing. The SMI index therefore dropped by over 8%, while its currency appreciated by over 15% in session. Switzerland already experienced this in 2011. We believe that companies, once over the initial surprise, are going to integration this new environment perfectly well in the coming quarters. The fears about employment in Switzerland – in heavily-exporting companies in particular – are indeed valid, our neighbour Germany has certainly proven that its exporting companies could continue exporting industrial goods, while keeping labour local.
It’s no small feat, if you think about it: in three years, Switzerland has turned the page on banking secrecy and on the peg to the euro
If you have read my 2015 Strategy Report and my GMGs, you are well aware of the fact that we have always felt the peg was untenable given the scope of the acceleration in the SNB’s balance sheet. More importantly, though, my view also rested on the fact that the European policy (and not elsewhere) kept increasing the standing of the Swiss franc as a safe-haven. Our doubt were confirmed when, in December, the SNB announced its passage into negative rates (-0.25%), and that the EUR/CHF hit 1.201.
Now, the fact of completely dropping the peg without a transition phase, and of moving its key interest rate directly to -0.75% leaves much to be desired. Besides which, yesterday evening, Head of the IMF, Christine Lagarde, declared that she had understood SNB President Thomas Jordan’s explanations, but that she found it hard to swallow that the head of the SNB hadn’t called her to at least inform her of what he was going to do, before actually doing so.
This is important news, because – just a few hours after the initial shock – rumours were running rife in the market about the ECB having called the SNB about the size of the QE that could well be announced next week…
While Lagarde’s speech could well refute the rumour, the SNB’s announcement gives rise to a number of questions – especially since this move comes but one week ahead of the ECB’s meeting and the vote in Greece.
As a result, while we certainly have a number of thoughts on the matter, we will refrain from making predictions. As things stand today, we know that:
• The acceleration in the size of the SNB’s balance sheet was becoming unsustainable just a few days away from a potential ECB announcement;
• The SNB is well aware of Draghi’s plans and feels that the depreciation of the euro would make keeping the peg impossible. Negotiations on the buy-back of SNB-held assets under the auspices of the ECB’s asset buy-back programme fall within the realm of the possible.
• There’s a ‘lone wolf’ marauding in the European (or political, or economic) system that we will only identify in a few weeks’ time (or less) – one that will have forced the SNB to drop all control on exchange rates. To continue in this option, SNB received a call from the Bundesbank???
Because, if I really study the facts, a third avenue of possibility emerges. But why is that?
• The euro has weakened against the USD, but is not at 1.05.
• Those sectors that rebounded strongly yesterday in Europe are: Basic Resources (+3.06%) and Oil&Gas (+3.69%). The banking sector under-performed, at +1.56%. Therefore, the European index was carried by those sectors which benefitted from the rebound in oil prices.
• The US 10Y went from 1.90% to 1.71%!!
• Unless Draghi announced a QE of a few trillion, the US media is floating increasing doubts about the ability of a QE to favourably impact the European economy. The German 10Y, meanwhile, is at 0.474%…
• Last but not least, the Eurostoxx50 index is just barely positive, year-to-date. This is not surprising at all, 7 days ahead of a so-called ‘historic’ QE.
This then becomes all the more true, since the exchange effect will have a positive impact on the results of European exporting companies. What can be said, though, of the euro’s global activity, when the World Bank has just ‘razed’ its growth forecast, going from +1.8 to +1.1% in 2015…
The same goes for social tensions: Following the recent terrorist attacks in France, Belgium yesterday evening saw a two suspected Jihadists being killed in an anti-terror police raid. Today, all schools in Belgium are closed. Let’s not forget those European countries where unemployment is above 25%, with the latter figure exceeding 40% in youth unemployment (an important age demographic for extremist parties and religious causes). Ukraine is falling ever more into the quagmire of civil war. Relations with Greece run the risk of becoming rather complicated… Draghi’s speeches are clearly becoming increasingly anti-German. Polish, Hungarian, and especially Greek (in CHF) lenders suffered heavy losses. According to ING strategists, “Hungary is now better-positioned that Poland on this issue of exposure to the franc”, at 1.8%. Polish household debt, denominated in francs, has on the contrary barely varied since 2010, at close to PLN 140 billion (EUR 32 billion). This is enough to put Polish banks at risk; indeed, they plunged yesterday on the stock market. Also, two Greek banks requested the activation of the Emergency Liquidity Assistance (ELA) facility of the Greek Central Bank, to the tune of over EUR 5 billion in cash…
All is well in Europe…
Coming back to fluctuations, yesterday’s movement were rather symbolic. In the first place, volumes were nothing short of gigantic. The SMI registered volumes of CHF 20 billion, compared to CHF 3.5 billion in general.
Foreign funds ‘profited’ from the rise in the currency (stronger than the index’s drop) to sell, at a profit, Swiss equities and buy Euro zone ones. In contrast, Swiss funds, facing the plunge in the rate-curve (the 10Y suite is close to 0%), bough local equities.
This movement is represented in our 2015 Strategy Report, as our strongest overweight in Europe was in Switzerland, and our profile is in USD. Therefore, the holding of an ETF on the SMI in CHF in this USD-denominated profile, rose by +8%.
Regarding Swiss pension funds, a change in legislation, allowing the latter to hold more local equities, would make sense as bond returns have just disappeared.
Following the SNB’s decision to abolish the ceiling rate on the euro, UBS has revised downwards – and markedly so – its outlook for Switzerland’s economic growth. The big bank does not, however, anticipate a recession, as is the case for the business institute, BAKBASEL. For UBS’s Wealth Management unit, then, the Swiss economy’s growth rate should therefore be at 0.5% this year, compared to the previously-anticipated +1.8%. For 2016, the increase in GDP is expected to be 1.1%, compared to the previously-expected 1.7%.
Now, the maintenance of a CHF/EUR parity will be a macro indicator of expectations for an ECB-led QE. I am maintaining my selection in Europe up until the ECB’s meeting, and are being wary of the Lemming Effect.
