January has been extremely volatile for financial markets with the main equity markets moving over 5% from high to low and then rebounding, bond yields continuing to fall and commodity prices, especially oil, getting crushed. There are 4 big themes driving financial markets right now:
Swiss Franc
Last week saw a huge surprise move by the Swiss National Bank (SNB) to abandon the Swiss Franc cap against the Euro which was one of the most dramatic moves in the FX markets for years. The Swiss Franc is known for its ’safe haven’ status with money flowing into the currency on the back of a still very troubled Europe. With the Swiss economy very dependent on exports (think Nestle, Roche, Novartis) Swiss Franc inflows pushed the currency to a high against the USD making it difficult for these companies to export as their goods became increasingly dearer in USD terms as the Swiss Franc appreciated. To combat the increasingly deteriorating situation for these companies and the Swiss economy, three years ago the SNB announced that it would instigate a ‘peg’ or a ‘cap’ not allowing the Swiss Franc to appreciate above this limit against the Euro using Central Bank (SNB) FX intervention to achieve this.
Despite consistent and recent assurance from the SNB that this ‘peg’ would never change last week saw a huge surprise move by the SNB in abandoning the cap, allowing the currency to trade without any intervention, leading to an unprecedented immediate 30% revaluation (strengthening) of the Swiss Franc. After 24 hours or so the appreciation settled down at +15%. The dramatic news sent shock waves around the Swiss equity market initiating a 15% decline in just 2 trading days. The largest hit were the large exporters as their products immediately became 15% more expensive outside Switzerland. Tourism will also be badly affected as its just become 15% more expensive to visit Switzerland. The SNB move could well push the economy into recession.
The initial market reaction was to sell equity markets, including the S&P and major European indices, however the latter soon rallied as investors came to the conclusion that it made QE from the European Central Bank (ECB) was now more likely (see below).
Quantatitive Easing (QE)
With huge swings in the equity and currency markets last week all eyes are focussed on Thursday’s (January 22nd) meeting of the ECB. Economic data from the Eurozone has continued to be poor with the single currency zone showing signs of deflation (negative inflation). Germany has never been a supporter of QE (which takes the form of ECB bond buying to pump money into the economy) however it appears that Central Bank is ready to act with some sort of German support. Markets expect an announcement of at least EUR 500 Billion of QE / bond buying. In this way Europe will be following both the US and UK with extensive QE with the former two countries now enjoying strong economic growth (US Annual GDP growth +5%, UK +2.6%).
Greece Elections
On the 25th January we have the Greek general election. In recent polls the opposition party, Syriza, is ahead of the ruling conservative party. Syriza are opposed to the austerity measures imposed on Greece as part of their ECB bailout given the dramatic effect it has had the Greek economy/unemployment. Investors are concerned that defeat for the conservatives could lead to Greece exiting the single currency and all the ramifications of that with Greece being the first Eurozone member state leaving. Would that mean others would leave? It would certainly lead to uncertainty and the markets hate uncertainty.
Oil
Oil remains around US$ 50 a barrel. Lower oil prices should be good for economic growth (industry has lower production costs and consumers have more disposable income as petrol prices fall) but the speed and dramatic nature of the oil price fall has unnerved markets i.e. how will Russia (a huge gas and oil exporter) cope with such a low oil price and a current very weak Rouble? How will the oil industry look as smaller oil companies fold unable to cope with such a low price for their end product? What are the implications for the US shale gas industry? But given the first three points above Oil is almost becoming slightly old January news!
EQUITIES
S& P 500: 2020
NASDAQ:4634
BONDS – 10 Year Government Yields
US 1.80
Ger 0.45
GB 1.52
FOREIGN EXCHANGE
USD/EUR 1.1600 ( 1 euro buys 1.1600 dollars)
USD/GBP 1.5135 ( 1 pound buys 1.5135 dollars)
COMMODITIES
OIL: Brent US$ 48.75 per barrel.
GOLD: US$ 1,290 per ounce
