Market Wrap: "It's Turmoil" - Overnight Gains Wiped Out, Futures Trade Below 2000 On SNB "Shock And Awe"

To paraphrase a trader who walked into the biggest FX clusterfuck in years, "it's total, unprecedented market turmoil."  So while the world gets a grip on what today's historic move by the SNB means, which judging by the record 13% collapse in the Swiss Stock Market shows clearly that the SNB market put is dead and the SNB may be the first central-banking hedge fund which just folded (we can't wait to see what the SNB P&L losses on its EURCHF holdings will be), here is what has happened so far for anyone unlucky enough to be walking into the carnage some 2 hours late.

Session highlights courtesy of RanSquawk

  • SNB surprise the market by calling an end to their minimum exchange rate and lower their interest rate to -0.75%
  • Initial reaction EUR/CHF briefly fell ~35 points (30%) while USD/CHF dropped its most since 1971. In sympathy EUR/USD printed an 11yr low at 1.1580 and the SMI remains down ~9% for the session
  • Looking forward SNB’s Jordan is due to hold a press conference to explain today’s decision at 1215GMT/0615CST. Major data from the States come in the form of Empire manufacturing, PPI, Philly Fed, EIA nat gas storage change as well as earnings from the likes of Citigroup, Bank of America and Intel.

**SNB DROPS CHF FLOOR AND CUT RATES**

The trading day was off to a quiet start ahead of US data and earnings later today when the SNB decided to drop the bombshell. In a surprise and unscheduled announcement the SNB called an end to their minimum exchange rate and lowered their interest rate to -0.75%, concluding that the CHF cap was no longer justified. In an initial reaction EUR/CHF dropped like a stone with USD/CHF marking its biggest fall since 1971, while EUR/USD printed an 11yr low at 1.1580. From a stock perspective the SMI fell 8% as the strength in the local currency is likely to impact negatively corporate profits as well as the Swiss economy itself which has already been battling a currency that was too strong even when the floor was in place. The move has also resulted in weakness in the HUF and PLN as both have relatively large loan exposure to Switzerland. Once the dust settled European stock futures bounced off the lows as EUR/CHF pared approximately half of the initial 30% move lower in the cross now trading around 1.05. This also came amid unconfirmed market talk that the SNB were back into the market helping prop up the currency from its lowest level.

Looking ahead we will see how the US interpret the news especially given the timing as we head closer towards the scheduled ECB rate decision due on the 22nd of January where it is broadly expected that the ECB will announce QE. Snap analysis from some banks suggests that the SNB may well have taken pre-emptive action ahead of anticipated ECB action by scrapping the floor as the cost would have been amplified by the drop in the EUR allied to cutting rates in order to deter market participants from parking their cash at the Swiss central bank.

FIXED INCOME/EQUITIES

The European curve is seen flatter this morning as a result of the surprise announcement from the SNB which is likely to further fuel the flames of ECB QE at the looming meeting next Thursday (22nd). Bund futures spiked higher on the release of the Swiss news tripping stops on the rise to further exacerbate the gains with the German 10yr yield now at 0.472%. In equity market the SMI is the standout trading down in excess of 9% as fears that strength in the local currency is likely to impact negatively corporate profits, particularly when there are large export names such as Nestle, Roche and Swatch based in the country.

OTHER FX NEWS

Overnight AUD outperformed bolstered by a stellar December jobs report (Employment Change +37.4k vs. Exp. +5.0k (Prev. +42.7k, Rev. +45.0k) and a fall in the unemployment rate to 6.1% from 6.3%, supported by a surge in full-time employment 41.6k (Prev. 1.8k).

In other news of note, the RBI unexpectedly cut its Repo Rate by 25bps to 7.75% from 8.00% in a surprise move in an attempt to curb falling inflation. The central bank also cut its Reverse Repo Rate by 25bps to 6.75% but kept the cash reserve ratio unchanged at 4.00%. (BBG)

COMMODITIES

Overnight, the commodities complex staged a recovery as Brent crude broke back above the USD 50 handle and WTI rallied to trade near USD 50/bbl it’s the biggest surge in two-and-a-half years. Although, WTI and Brent has since come off best levels in the European session. Furthermore, COMEX copper prices have traded slightly rebounded from yesterday’s sharp decline to 5 and-a-half year lows providing the material sector with some reprieve. As we head toward the North American session, gold is testing its 200DMA at USD 1253.47 and has not traded above there since August 2014.

Other notable headlines via Bloomberg:

  • Treasuries gain, led by 3Y and 5Y; 10Y yields at lowest since May 2013, 30Y near record low as Swiss National Bank unexpectedly drops franc cap, Reserve Bank of India cuts benchmark rate.
  • OPEC cuts demand for its crude in 2015, already at 12-yr low, by 100k b/d to to 28.8m b/d; forecast U.S. output is slowing as prices tumble, group says in its monthly oil market report
  • BP said to expects $50-$60 oil for next three years, BBC’s eco editor Robert Peston says in Twitter post, without saying where he got info
  • CHF soars as SNB abandons 1.20 cap vs EUR, says enforcing cap no longer justified, brings forward planned rate cut -0.75% initially set for Jan. 22
  • Move comes just one week before ECB policy makers meet to discuss the purchase of government bonds, a move that may add to pressure on the franc against the euro
  • Indian stocks, bonds and INR surged after Rajan lowered repo rate to 7.75% from 8%, first reduction in 20 months; move sets India apart from BRIC counterparts Russia and Brazil, which boosted rates after currency declines that spurred inflation
  • Yellen has signaled she wants to look past short-term market fluctuations and place economic outlook at center of policy making; to succeed, she must wean investors from the notion that the Fed will bail them out if their bets go bad
  • Germany’s economy grew 1.5% in 2014, fastest pace in three years, matching median estimate in a Bloomberg survey
  • China’s shadow banking industry staged a comeback in December as equity investors and local governments contributed to a surge in credit
  • Bank of China Ltd. is suing a unit of Kaisa Group Holdings Ltd. after the developer skipped a payment on its USD bonds and as local creditors seek to recoup funds
  • Sovereign yields mixed. Asian stocks rise; European stocks, U.S. equity-index futures decline. Crude lower; copper and gold higher


US Event Calendar

  • 8:30am: Empire Manufacturing, Jan., est. 5 (prior -3.58)
  • 8:30am: PPI Final Demand m/m, Dec., est. -0.4% (prior -0.2%)
  • PPI Final Demand y/y, Dec., est. 1% (prior 1.4%)
  • PPI Ex Food and Energy m/m, Dec., est. 0.1% (prior 0%)
  • PPI Ex Food and Energy y/y, Dec., est. 1.9% (prior 1.8%)
  • PPI Ex Food, Energy, Trade m/m, Dec., est. 0% (prior 0%)
  • PPI Ex Food, Energy, Trade y/y, Dec. (prior 1.5%)
  • 8:30am: Initial Jobless Claims, Jan. 10, est. 290k (prior 294k)
  • Continuing Claims, Jan. 3. est. 2.4m (prior 2.452m)
  • 8:45am: Bloomberg Jan. U.S. Economic Survey
  • 9:45am: Bloomberg Consumer Comfort, Jan. 11
  • 10:00am: Philadelphia Fed Business Outlook, Jan., est. 18.7 (prior 24.5, revised 24.3)