There’s been a recurring phenomenon at the World Economic Forum in Davos this week. If the global elite have finally found their way to a particular narrative or viewpoint — this year’s core fascinations being tech disruption, Europe’s existential crisis, the sell-off in markets and commodities and Chinese devaluations — you can be darn sure those topics are peaking.
The uncomfortable undertone to the above is that almost no-one was worrying about any of the above this time last year.
Of particular interest in that context: Why did the global elite miss probably the most significant capital reversal flow story of our time? And its effect on oil producer states and emerging markets? Read more
Regarding how low negative interest rates can go, Paul Krugman wrote a couple of weeks ago that:
When central banks push interest rates on government debt below zero, the effective lower bound is the return on cash held by people who would otherwise be holding that government debt — not people looking to expand their checking accounts. So the liquidity advantages of bank deposits over cash in a vault are pretty much irrelevant. It’s all about the cost of storage.
The SNB’s historical time series on interest rates and yields offers some fun charts the week that Nestle bond yields fell below zero:
There is a straightforward answer to the question in the headline: more money has been trying to get into Switzerland than get out, which didn’t affect the exchange rate as long as the Swiss National Bank bought foreign currency. As soon as they stopped, the exchange rate adjusted to balance the new set of flows. But a detailed look at the gross flows in and out of the country provides a more nuanced and interesting picture.
In the heady days of 2010-2012, when it seemed as if the European Project was always one secret weekend meeting away from exploding in a fireball of poisonous politics and innumerate economics, Switzerland looked like a nice place to put your money. It was especially attractive if you were a resident of a stressed euro area country worried about wealth taxes, bank failures, currency re-denomination, or all of the above. Read more
One of the most predictable consequences of the Swiss National Bank’s decision to stop suppressing the exchange rate between the franc and the euro was the whinging of Swiss exporters. That doesn’t mean the policy change was an error. If anything, it may help rebalance the Swiss economy away from its excessive dependence on exports towards greater levels of domestic consumption.
The clue is Switzerland’s ridiculously large current account balance. The chart below shows the countries with the six biggest current account surpluses and six biggest current account deficits: Read more
Switzerland’s “anyone can initiate a referendum if they’ve got enough signatures” society gets to vote on the “Save our Swiss gold” proposal this Sunday, which aims to make it compulsory for the Swiss Central Bank to hold at least 20 per cent of its assets in gold bullion and repatriate all Swiss gold that’s held abroad.
The proposal also plans to make it illegal for the SNB to sell any of the gold it accumulates. Ever.
What’s worth noting ahead of the poll, though, is how the naturally occurring phenomenon of “too many non-productive gold assets in our economy” has struck economies in the past. Read more
One of the problems with ECB QE, as we all know, is the lack of a collective eurobond or sovereign-neutral asset to target, which would make asset purchasing less, you know, subjective vis-a-vis the assets you choose to support and those you don’t.
It is for this reason that analysts are divided about the type of assets Draghi may or may not be inclined to target.
There is, after all, a delicate balance between targeting ETFs or real-estate trusts neutrally and buying corporate stock or housing, which can evoke the start of quasi nationalisation of the economic system, if not government favouritsation of specific sectors, corporations or industries. Read more
According to Goldman, the answer is sooner than the market thinks. A new note argues that the Swiss franc is already overvalued against the euro, which should give the Swiss National Bank cover to raise rates in response to a vibrant domestic economy and an overheating housing market.
Thanks to a history of low inflation, institutional stability, and (until recently) a long tradition of banking secrecy, money tends to flow into Switzerland when people are worried, and it flows out when investors are looking to take more risk. Between the 2007 low and the peak in the summer of 2011, the trade-weighted franc appreciated by nearly a third as savers in the euro area worried about the collapse of the single currency. Read more
Passed along by Sebastien Galy of Societe General:
One core benefit of a high CHF was cross-border shopping in the Eurozone. Looking at the pattern of voting, one can forecast some significant slowdown at the Italian and German borders as has been the pattern in the past. Other consequences from the EU will take time to percolate. Read more
The Swiss National Bank on Thursday reiterated its commitment to maintaining a minimum exchange rate for the Swiss franc, noting that in its opinion the currency was still strong.
Inflation numbers were slightly better, though not enough to encourage a shift in the SNB’s long term inflation forecast, which remained unchanged for 2015 at 0.7 per cent. Read more
It’s been a long time coming, but Geneva property owners desperate to sell are finally beginning to slash prices after a summer season characterised by a bitter standoff between buyers and sellers.
Transactions throughout the period were few and far between as bid-ask spreads widened dramatically, especially in the SF3m plus market range. Read more
Everyone has an open mind about negative rates these days… Swiss National Bank chief Thomas Jordan has said he certainly does following this piece of repeat advice from the International Monetary Fund’s annual report on Switzerland (our emphasis):
The conjuncture of Switzerland may render some of the potential drawbacks [of negative interest rate] less relevant than in other countries. Activity in the interbank market is already very low, as all banks have excess liquidity. Switzerland is experiencing strong credit growth, particularly in the mortgage market. The impact of negative interest rates on mortgage rates depends on the pass-through.
Are you a Swiss bank? Do you have haven appeal? Want to make some quick, easy money? Then keep reading…
Credit Suisse has decided it will start charging negative rates on Swiss franc cash balances above a certain threshold. From CS: Read more
Is the Reserve Bank of Australia intervening in the market to hold down the remarkably resilient Aussie dollar? That’s the question commentators and economists are asking themselves following the publication of data at the end of last week that showed a significant increase in the pace of foreign exchange accumulation (admittedly from a low very low base) in August and September. Read more
There is plenty of chatter out there about the Swiss franc floor being raised (and just as it celebrates its first birthday party too).
Nobody we have talked to has any actual idea if Jordan et al at the Swiss National Bank will kick the floor up (with SFr1.22 the likely spot if they do) and most don’t see them actually doing it . Read more
This is kinda sweet. From Fitch:
The Swiss National Bank’s (SNB) statement that UBS (‘A’/Stable/’a-’) and Credit Suisse Group (‘A’/Stable/’a’) should promptly improve their loss-absorbing capacity confirms that Switzerland maintains one of Europe’s strictest supervisory frameworks for banks, Fitch Ratings says. Read more
The Swiss boson is a hypothetical condition which is supposed to account for why the Swiss franc has ‘mass’ when all other neighbouring currencies don’t.
A multi billion-euro experiment, operated by BERN (but funded outright by tax payers), is currently under way on the borders of Switzerland and the Eurozone to try and stamp out the asymmetries, ideally by creating something known as the ‘anti-franc’. Read more
UBS announced lacklustre results on Tuesday, saying it expected further weakness in investment banking in the first quarter.
But the bank also provided details of some interesting underlying trends at the bank, funding wise. The following table taken from the bank’s results statement provides a good summary (click to enlarge): Read more
UBS issued a gloomy outlook for the current year, noting the tough conditions experienced in 2011 were likely to be prolonged, meaning “traditional improvements in first quarter activity levels and trading volumes may fail to materialise fully”, the FT reports. The Swiss group warned such conditions would “weigh on” its first-quarter results, notably in investment banking. The downbeat forecast came as the group said net profits in the fourth quarter slumped to SFr393m ($426m), reflecting the severe pressures on earnings seen at some US rivals and at Deutsche Bank in Europe. Earnings were a fraction of the SFr1.66bn made in the same period the previous year and demonstrated the impact of tough markets, reluctant clients and heavy costs, in spite of savings. Fourth-quarter earnings in investment banking, as at some rivals, turned negative, with a SFr256m pre-tax loss, compared with a profit before tax of SFr100m the previous year. The poor results reflected sharply lower revenues in all the investment bank’s businesses, notably the two powerhouses of equities and fixed income, currencies and commodities.
Hildebrand’s wife, Kashya Hildebrand, said in a written statement published on Swiss television late yesterday that her “interest in the dollar purchase was motivated by the fact that it was at a record low and almost ridiculously cheap.”
Via Bloomberg. Interesting background to that statement… Read more
Brussels is threatening to sue Britain unless ministers significantly alter a landmark tax deal with Switzerland, in a dispute that will cast doubt over the £4bn to £7bn of expected proceeds for the Treasury, the FT reports. European Commission lawyers concluded that the bilateral deal, which recovers billions of unpaid taxes in return for protecting the prized secrecy of the Swiss banking system, is in breach of EU laws that are tougher on tax evasion. Algirdas Šemeta, the EU’s tax commissioner, said he was “ready to defend this key principle” if no progress is made.
Swiss banks are likely to settle a US probe of offshore tax evasion by paying billions of dollars and handing over names of 5,000 to 10,000 Americans who have secret accounts, Bloomberg reports, citing two people familiar with the matter. Talks between US and Swiss officials are concluding on a civil settlement amid US criminal probes of 11 financial institutions, including Credit Suisse, suspected of helping American clients hide money from the Internal Revenue Service, the report says, citing five people with knowledge of the talks. One source said the Swiss government would outline a final accord to a parliamentary committee on November 10.
Switzerland’s traditional centre-right political parties were the big losers of Sunday’s national elections, as centrist rivals bit deeply into their support, the FT reports. But the election also represented a rare setback for the Swiss People’s party (SVP), putting an end to almost a quarter century of rising popularity for the ultraconservative anti-immigration group and Christoph Blocher, its billionaire figurehead. The centre-right Radicals, and, to a lesser extent, the more centrist Christian Democrats (CVP), were the biggest losers, suffering at the hands of the emerging Green Liberals and the Conservative Democrats (BDP). Support for the Radicals fell to 15 per cent from 17.7 per cent in 2007, while the CVP saw its vote decline to 12.1 per cent from 14.5 per cent.
Carsten Kengeter, head of UBS’s investment bank, plans to accelerate changes to the business’s size and structure following the Swiss group’s discovery of $2.3bn in unauthorised trading losses. Mr Kengeter, who senior executives say retains the board’s backing in spite of the losses, believes his division needs to move more quickly to reduce risk and to exit non-core businesses, the FT reports, citing people familiar with his thinking. The prime area for cuts is in UBS’s fixed-income business, which lacks the scale and the risk appetite to compete with global rivals. However, the trading scandal may force the bank to take an axe to higher-risk activities in its equities business, historically one of the bank’s strengths. Meanwhile the Swiss parliament piled pressure on the bank on Monday in the wake of the loss, reports Reuters, with a proposal to reopen debate debate on tough new capital measures for UBS and Credit Suisse so that a ban on investment banking could be added only narrowly failing to gain enough support. A plan to raise capital requirements passed the lower house.
There’s a great note from Marc Ostwald of Monument Securities this Thursday morning.
And he gets right to the heart of the issue. Read more
Switzerland’s decision to suppress Swiss franc strength via unlimited foreign exchange intervention will see the Swiss National Bank accumulate untold amounts of euro reserves, writes FT Alphaville. How the SNB chooses to invest those euros will be watched closely. Among the options are investing in core eurozone or periphery debt — both of which carry risks, notably by aligning Switzerland’s interests ever more greatly with those of the eurozone. This is why Deutsche Bank’s George Saravelos says the SNB could be tempted to take reserve management off-balance sheet. One way to do this would be to start its own sovereign wealth fund instead. Read more
Here’s an interesting view on the consequences of the SNB’s move from Societe Generale’s Sebastien Galy.
First of all, as others have noted too, Galy believes the decision to defend a 1.20 level floor against the euro is credible this time, since the environment is very different. Not only is there a political will to intervene, measures like CPI — which are dropping — justify an expansion of the monetary base. Read more
Or, turning the leveraged into fondue. Hat-tip to Scott Barber of Reuters graphics:
Switzerland should solve its dispute with the United States over wealthy citizens using secret Swiss accounts to dodge taxes under existing laws in a way that continues to protect bank secrecy, the Swiss Bankers Association head said on Monday, Reuters reports. Patrick Odier, the association’s president, told newspapers on Sunday that the United States has given an ultimatum to Switzerland, saying that unless detailed information on tax evaders using Swiss accounts is handed over this week Credit Suisse and nine other banks will face charges. “The cross-border problems with the United States can and will be solved. But the United States must understand that Swiss laws must be respected,” Odier told a news conference, according to Reuters. “Bank client secrecy protects wealth and does not hide it. This protection remains important.” In Odier’s opinion Switzerland must avoid repeating the deal it made to settle a US investigation against UBS. This bent many of the country’s banking secrecy laws and revealws the details of around 4,450 clients to avoid criminal charges.