Europe
There was a lot of turbulence in European equity markets on Thursday after the Swiss National Bank dropped the bombshell that they will no longer maintain the Swiss franc’s peg to the euro. The possibility of blowback across global markets meant equities initially collapsed when the Swiss peg gave way but soon regained their footing on the realisation the Swiss action was likely taken in anticipation of ECB bond buying.
As soon as the 1.20 handle gave way the floodgates opened and a wave of safe-haven flows flooded the market as the Swiss franc, Japanese yen and gold all rallied. The Swiss franc has since given back around half its gains, perhaps in part due to the Swiss bank lowering rates further into the negative at -0.75%.
Safe-haven currencies and gold maintained their initial strength but equities U-turned. Following the European Court of Justice ruling yesterday, this is the strongest signal yet that QE from the ECB is on the way.
There was some positive economic news in Europe as German GDP grew at the strongest rate in three years in 2014. If QE does get underway from the ECB on January 22 then the export boost to Germany from the lower euro could see further GDP expansion in 2015.
The German DAX underwent a massive reversal, having at one point been down as much as 300 points it reversed to go over 100 points higher and challenge its all-time highs at 10,095.
The rising Swiss franc is a major blow to Switzerland whose exports will be competing against those out of the European nations who use the euro and explains why the Swiss Market Index (SMI) crashed as much as 9% on Thursday.
UK stock markets saw a resurgence as commodities made a comeback led by gold miner Randgold as gold broke to the highest levels since September.
Tullow Oil Plc (LONDON:TLW) could have been a position to take advantage of the rising oil price that saw Brent and WTI break back through $50 per barrel but was essentially flat after the oil company announced a more than 50% drop in profits last year as well as a series of write-offs and impairments thanks to the drop in oil prices.
US
US markets underperformed their European counterparts on Thursday as the respective monetary policies appear to be diverging in favour of Europe as the ECB moves towards what appears to be almost certain QE, a likely boon for risky-assets.
Unemployment rose above 300k for the first time since November showing deterioration in the labour market coming off the slowdown in NFP job growth in December from the multi-year highs in November.
The US jobs trend in January can for now be put down to seasonal factors as hiring slows post the jump before the holiday period. Should there be a few more weeks of claims above 300k that may start to impact the outlook for the US labour market and as such the timing of the first Fed rate hike.
FX
The US dollar was mixed on Friday as the Swiss franc, euro and Japanese yen dominated proceedings.
EUR/CHF collapsed 30% in early European trading following the announcement from SNB Chairman Thomas Jordan that the bank would be dropping its peg to the euro.
It was only a week or so previously that the Swiss National Bank had expressed a determination to defend the peg as their central policy. The EUR/CHF had been looking week amid signs of desperation from the SNB when it introduced its negative rates policy to defend against safe-haven flows out of the Russia ruble. After its first move to -0.25% rates, the EUR/CHF only rallied 40 pips to 1.2040 but soon fell again to the floor around 1.20 showing the market’s belief that QE from the ECB would overwhelm the SNB’s NIRP policy.
It was the surprise-factor that exacerbated the initial move in the franc as panic erupted for all those long EUR/CHF and euphoria for those short.
The Swiss National Bank has had this peg in place since 2011 in attempt to prevent an appreciation of the Swiss franc to defend its export market. As it turned out, the SNB have just been delaying the inevitable and by doing so caused the pain to hit all at once and to greater extent than might otherwise have occurred if left to market forces.
Having seemingly put in a top above 120, USD/JPY saw more sharp declines on safe-haven demand. Should the 115.50 low from December get broken this could open up further gains for the yen.
Commodities
Gold rose to its highest level since September building on its recent rally that has gained steam this year. The SNB essentially reneging on their promise to defend the peg will have many in the markets question their unwavering faith in central banks. If the action from the SNB leads one to distrust central banks and question their ability to control the value of their currencies one needs to be in gold and silver.
Oil prices made an early recovery on US Dollar weakness but fell back as new sellers used the bounce as an opportunity to come in above the $50 per barrel mark on the belief supply and demand factors mean oil prices should head lower.
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