The early bid for Swiss Francs following the Greek election results has turned into a bloodbath of outflows as EURCHF has swung a huge 230 pips overnight with Swissy now at its weakest to the Euro since before QECB leaks last Wednesday... One wonders if the SNB is back in the game?
- Sovereign QE not working in Europe
- Emerging market capital flight
- Political risk/popularist governments
- US wage inflation
- Increased currency volatility
- Insurance against natural catastrophes
As reported earlier, several hours ago Saudi Arabia announced that its 91-year-old King Abdullah had passed away, in the process setting off what may be a fascinating, and problematic, Saudi succession fight which impacts everything from oil, to markets to geopolitics, especially in the aftermath of the dramatic political coup in neighboring Yemen. As a reminder, it is Saudi Arabia whose insistence on not cutting oil production with the intent of hobbling the US shale industry has led to the splinter of OPEC, and to a Brent price south of $50. Which is why today's event and its implications will be analyzed under a microscope by everyone: from politicians to energy traders. Here, courtesy of Ecstrat's Emad Mostaque, is an initial take at succession, the likely impact on oil, then the Saudi market & currency and finally regional politics.
Swiss interest rates were already the lowest in the world before The Swiss National Bank de-pegged from the Euro last week but in the ensuing few days, investor demand for the 'safety' of Switzerland has collapsed the yield curve to levels thought impossible just weeks ago...
It would appear the housing data was not the growth-inspiring 'everything is awesome' facts that we were told about last night. US Treasury 30Y yields have just broken to a new record low 2.3500% handle... The yield curve (2s30s) has cracked lower to its flattest since 2008. As we explained here, this is not unexpected as anticipation of ECB QE means duration scarcity rules.
The old joke is "In America, you correct newspaper, but in Soviet Union, newspaper corrects you.” Switzerland is now experiencing the bond market equivalent.
The Fed's own favorite mouthpiece Jon Hilsenrath (for more see "On The New York Fed's Editorial Influence Over The WSJ"), just released a piece in which he claims, or rather his sources tell him, that the Fed is "on track to start raising short-term interest rates later this year, even though long-term rates are going in the other direction amid new investor worries about weak global growth, falling oil prices and slowing consumer price inflation." In other words, just like the ECB in 2011, the Fed which has hinted previously that it will hike rates just so it has "dry powder" to ease once the US economy falls into recession, will accelerate a full-blown recession in the US when it does - if indeed Hilsenrath's source is correct and not merely trying to push the USDJPY higher (for reference, see Reuters "exclusive" report on the Samsung takeover of Blackberry, denied by both parties within hours - hike some time this summer.
First the good news... European Stocks (ex Greece and Switzerland) exploded higher this week with 'great' nations like Portugal (up over 7%) and Italy (up over 5.5%) and Germany's ADX over 10,000 to record highs. EU bond spreads compressed notably (Spain/Italy down 20bps or so on the week) and EURUSD crashed below 1.15... all on hopes that the SNB decision means Moar-Massive ECB QE comes next week (not priced in). But the bad news... Swiss stocks collapsed-er again today for the worst week since Lehman. Swiss bond yields are negative to 12 year maturity and EURCHF is back below par at 0.9820...
Swiss 10Y rates crashed over 10bps by the close (having plunged as low as 3.3bps at one point) but the entire Swiss curve is negative at any maturity less than that. EURUSD crashed over 200pips back below 1.16 - the lowest since November 2003. Swiss stocks crashed around 15% before bouncing back to a 8-9% loss - the biggest drop since 1989. Away from Switzerland (and Greece) European stocks and sovereign bonds saw initial dips bought on ECB QE implications but EU Sovereigns did bleed back wider. European VIX spiked from sub-29 to over 32 and all the way back down to close lower on the day.
The US markets are just waking up to the bright red margin calls but the carnage in Switzerland remains. The Swiss Market Index plunged almost 15% on the SNB news (and is bouncing back modestly) to 3-month lows (Bullard lows) before bounciung back modestly. The Swiss yield curve has been crushed 10-20bps lower with yields negative all the way out to 9 year maturity... EURCHF is holding 1.02 for now...
Currently there are a number of weak spots in the global financial edifice, in addition to the perennial problem children Argentina and Venezuela... The happy bubble in risk assets could presumably be derailed a bit if any of the possible worst case scenarios were to become manifest.
It is important to remember that the supportive underpinnings are deteriorating. Valuations are elevated, bullishness and complacency are high, and deviations are at extremes. The combination of these ingredients has never led to a profitable conclusion and expecting a different outcome this time will likely lead to excessive disappointment.
Chicago Fed's Charlie Evans called the drop in rates at the longer-end of the Treasury yield curve "extraordinary," falling just short of screaming "sell, sell, sell bonds" and threw wrench in the Fed's policy path by noting "raising rates at the wrong time would be catastrophic." So it is noteworthy that damage control appears to have been engaged this morning by no lesser Fed mouthpiece than Wall Street Journal's Jon Hilsenrath. Reminding the public of Bill Dudley's fears, when he argued the Fed had the wrong reaction to lower long rates in the 2000s, a mistake that might have contributed to the housing boom that ended disastrously; when instead the Fed should push rates higher sooner or more aggressively than planned.
The Greek 3Y-10Y yield curve is back over 400bps inverted this morning as bond (and stock) prices re-tumble following a new reports. As The FT reports, forecasting group Oxford Economics says it has carried out an "in-depth" analysis of opinion polls ahead of Greece's snap general election on January 25, which shows that the radical Syriza party is on course to win a "clear mandate" to push through anti-austerity policies. Will German worry now?