Is There Any SNB Out There? Eurostoxx' Head Deep In Koolaid

Tyler Durden's picture

From Nic Lenoir of ICAP

We have already discussed at length European sovereign spreads, the cost of keeping the PIIGS in the eurozone, the inevitable break-up down the road of the EMU, and how EURCHF is ratting out major stress in the system at a time when everybody is trying their best to look the other way. Today adding to our arsenal of charts highlighting the build of massive distortions in the system, I look at EURCHF against Eurostoxx. A friend of mine sent a chart that got me thinking about quantifying the distortion between the two. In order to compare apples to apples, I compared the 1-month % change of both EURCHF and Eurostoxx normalized using their respective volatility. Basically I divide the 1M % change in Eurostoxx by the VDAX index (equivalent of VIX for the Dax) and multiply it by 100. For EURCHF I use the annualized volatility implied by 1M options.

First looking at the two from 2006 to the end of 2008 we realize that is it EXACTLY the same trade! Not really surprising but it is the most convincing graphical representation of this secular relationship. Then came 2009 and central bank intervention, and correlations or logic became completely obsolete. Just like for the higher bonds / higher stocks trades we entered a new era of market logic (or lack thereof in the case of EURCHF and Eurostoxx). We saw Eurostoxx rally despite the credit degradation in European sovereigns on the back of quantitative easing in the US and inventory rebound, while EURCHF reflected the flight out of EUR into CHF. Then as equity markets caught up to reflect the degradation in credit space the SNB held EURCHF up! By the time the SNB gave up on holding down the Swiss France artificially stocks started rallying but FX plunged anyways celebrating the SNB's capitulation. The result is a massive increase in the volatility of the spread between the two markets (after normalization to adjust for respective volatility levels).

There was a brief period before QE 2.0 and the Irish bailout and after the SNB gave up on fighting the market when the trade re-correlated (see 2009-2010 chart) but QE 2.0 is back distorting the natural order of things. Just like facing the wind when urinating in the ocean from a sail-boat, we can be pretty certain that either EURCHF will turn dramatically (helped of not by the SNB) or stocks will soon know a reversal of fortune. Either way relatively value macro observers can start lining up bids and offers and prepare cashing in on natural or central bank induced convergence, which shall prove to be brutal. As I write we are getting close to the widest gap in 5 years...

In other observations Gold is struggling as it has so far failed to bypass the neckline of the H&S triggered on the 61.8% retracement of the key bearish reversal in early December. I urge people to be cautious and hedge there longs if the 50-dma is breached as the divergence and potential for a correction in the paper market is certainly very high. Interestingly we also observe that Copper is on an interesting resistance daily, and even more so approaching a HUGE multi-year resistance on the monthly chart. With that in mind if/when China hikes expect massive blood in that market. People who are not interested in shorting commodities can express the view buying the crude/copper ratio which is on its lows since 2007. Who cares about peak oil when you have peak copper???

Good luck trading,


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RobotTrader's picture

And good luck to you, Nic!!


RobotTrader's picture

Due to the hammering of GDX and GDXJ today, I blew out about 75% of my long positions a half hour ago.

Gold stocks might be telegraphing a big correction in the SPY within days.

We are up 5 days in a row, and up 15 out of the last 17 days.

It's been a killer year so far, so it is time for me to relax and enjoy the holidays and roll the risk way back.....

Now I'm just playing with some chump change, just for kicks.

LowProfile's picture

Gold stocks might be telegraphing a big correction in the SPY within days.


Pretty funny that you're still got junks, despite you posted your first bearish opinion on equities in months...

French Frog's picture

Yeah, that's because amongst the many great thinking minds in here, there are plenty who have slowly forgotten to think for themselves and will carry on junking the same people over and over, even when those people make a valid point and (shock and horror) also happen to be correct.

This is definitely a development within ZH that isn't great but it had to be expected: give people a voice and allow them full annonimity and some will quickly revert to a level not that different from the moronic remarks posted on youtube

gwar5's picture

It's the end of the year, kids gotta eat and get their presents. People are closing out their gains.

MrTrader's picture

RoboTrader, I am missing your chiquitas bonitas photographs...:=) You certainly have one hidden on your desktop...:=)

Gully Foyle's picture

Black Dynamite: I'd like to take the credit, but dig, mama, there's no "i" in "revolutio...", in "team."

Tic tock's picture

Not that it could happen...but if you were a major bank and you knew that the CHF would become the temporary reserve, you might get what you see now, as well as a volatile dollar. -just bouncing.

Cdad's picture

Oh, man...that German guy snuck in and got his I knew he would.  This is embarrassing.  Little Miss Euro is in the dry heaves part of it now...standing there by the railing...her hair

It looks to me like Miss Euro has hit blood toxicity levels that would confirm that we probably open tomorrow to the up skirt shot appearing on the front page of der spiegel tomorrow morning.


But I don't trade what do I know?

ZeroPower's picture

USDCHF will be an epic long.


gwar5's picture

Gold - Chinese floor

Silver - Industrial + monetary demand

Copper - JPM monopoly


They all look good to me.

gwar5's picture

Anybody ever buy NSRGY for proxy of CHF? 

Diverse global Swiss food conglomerate, pricing power, and makes really good instant hot chocolate with the little marshmellows?

Lord Peter Pipsqueak's picture

Good luck with those SPY shorts Nic.

chinaguy's picture

"We also observe that Copper is on an interesting resistance daily"

You can analyse the charts all you want...but if a single player does indeed control 90% of the LME copper,  you might as well flip a coin....

swissinv's picture

gold can be only understood when looking at fundamentals:

Miles Kendig's picture

Terrific read all year.  Thanks Nic

Churn potential in commodities, especially metals, still looks quite sweet.  Those darn correlations keep popping up.  Nice charting

Buck Johnson's picture

The Euro won't be around to long, but the dollar won't be either.  What will happen is that the EU will break apart.  The poorer economies used the EU to subsidize their spending and the wealther economies used it to make the poorer economies buy most of their stuff from them by hook or by crook.

RoRoTrader's picture

Very best wishes, Nic. Thanks for all of your insightful articles.

MrTrader's picture

Where is uncle Hildebrand from SNB? Time for an intervention. Everybody on Christmas vacation gives you some opportunity to jumpstart EUR/CHF, Hildi !