SNB move, nobody saw that one coming

Good Morning,

European bond market were characterised by Wednesday’s announcement by the European Court of Justice, which stated that any form of OMT program (outright monetary transactions) is legitimate and is “suitable for bringing about a reduction in the interest rates on government bonds of the States concerned.” This ruling was massive for the European bond market as speculation the ECB will conduct its monetary policy in the form of asset purchases in next week’s ECB meeting on 22 January is slowly unfolding as the date draws nearer. As we have highlighted on our daily commentaries, and clearly set out in our recently published credit outlook for the first half of 2015 (http://www.timesofmalta.com/articles/view/20150115/business-news/calamatta-cuschieri-publishes-cc-credit-outlook-for-h1-2015.552006) next week’s announcement is an almost certainty, and anything short of market expectations by ECB’s Draghi (at least €500bn worth of asset purchases, even this amount might be insufficient) could have a devastating impact on risky assets. If expectations are met however, we expect spread tightening across European sovereign bonds, most notably in the periphery whilst also BBB bonds stand to gain within the corporate bond market.

Of key significance was yesterday’s move by the Swiss National Bank (SNB), which caught the market unawares, stating that it will halt its 1.20 minimum exchange rate floor against the euro, a measure introduced well over three years ago. The SNB went one step further and lowered its deposit rate to -0.75%. What implications has this got for European markets? Quite a bit one can argue, most notably within the banking sector, especially those exposed to emerging markets as the ramifications of larger currency swings could be large, as the cost for emerging market economies to service their foreign debt could increase. The negative impact is obviously expected to hit the Swiss domestic economy, with two of the country’s leading sectors, the banking and watch-making industry, expected to be hit hardest, as the price of Swiss products and services has risen by an average of 15-20%. Naturally, Swiss equities lost ground, with companies such as Swatch, UBS and Credit Suisse, to name a few, leading the decline. With the ECB on the verge of announcing QE, it might well be that the SNB thinks that the floor of EURCHF/1.20 is no longer warranted and necessary. Despite this, the SNB has made it clear that it will remain active in its intervention in the FX market, stating that it “will continue to take account of the exchange rate situation in formulating monetary policy in the future”

Meanwhile, earnings season kicked off this week, with the usual Alcoa being first to announce their Q414 results. Mid-week we have also had the start of US Q4 bank earnings season, with key banks such as JPMorgan, Wells Fargo and Bank of America to name a few reporting results below market expectations. Revenues were weak, earnings declined and more importantly, trading profits were worse-than-expected. However not all is doom and gloom as some banks actually made reference to the current price of oil, which is deemed to be positive for the US consumer in the long run and it should impact businesses and spur investment. However, sentiment remains subdued as Wednesday’s disappointing retail sales figures and the large exposure of US companies exposed to the energy and commodity sectors remains a drag on US growth prospects and expectations for 2015, not to mention the lingering effect lower commodity prices could have on inflationary data.

With a long-weekend in the US coming up (Martin Luther King Day 19 January), all eyes are on incoming economic data in the US and eurozone today, with some key CPI data releases in both regions and Industrial production data in the US for the month of December. Meanwhile, Goldman Sachs are due to report earnings, definitely one to look out for following the lacklustre performance of its peers earlier on this week.

Have a nice day!

Mark