Switzerland Plays the Spoiler

from Outsider Club Overview: Increased volatility on the markets continued as this week was full of surprises, reversals, and unpredictable currents. The Swiss National Bank’s abrupt departure in monetary policy that unpegged the Swiss franc from the euro had the greatest immediate effect on the markets, but a disquieting uncertainty now reigns supreme going forward. GOVERNMENT & POLICY Get Comfortable, This Is the New Normal Understandably, in the time since the Federal Reserve completed its gradual tapering of quantitative easing purchases, much has been made about the approaching “normalization” of monetary policy. Market sentiment can change quickly, even without blindsiding central bank policy adjustments. The last two weeks have undeniably been shaped by unforeseen events with macrocosmic implications that transcend our immediate economic and political concerns. Even aside from the Charlie Hebdo attacks and the decoupling of the Swiss franc from the euro, souring economic measures would have shaken the rosy, post-holiday hangover from the markets’ eyes. The disappointing numbers have been diffuse across the American economy: Jobless claims climbed, wage growth receded, crude inventories remained in oversupply, factory output slowed, manufacturing sputtered, and consumer prices fell to a six-year low. It’s no surprise that Treasury yields plummeted even further; investors can live with sub-2% yields so long as inflation remains largely non-existent. What is particularly troubling about all of this isn’t necessarily the data itself. Rather, it is the reaction to the data. Sailing the stagnant waters of the world economy is tough enough; trying to do so with a boat full of delusionally cheery deckhands or, conversely, a ship of suicidal sailors jumping overboard, is an exercise in madness of another order entirely. That’s essentially the reality we’re facing. People are either heading for the bright red EXIT sign or diving headlong into the chaos. The central banks have pigeonholed themselves into a scenario where a large segment of the markets actually root for bad news and a sluggish economy, because they know the monetary authorities will accommodate them and advance their very near-term goals. Sure, it’s compelling to the dispassionate observer, but only in the way a runaway train is thrilling to watch pass by. When your wealth is in cargo, following the careening path of the potential trainwreck takes on a very different significance. MARKETS How Swiftly Fortunes Reverse After an unpredictable ride last week, the markets were again playing seesaw this week, and again experienced a shock on surprising midweek news out of Europe. Luckily, no lives were lost this time, and the unexpected move has likely brought a bit more clarity (albeit a painful clarity) to the near-term outlook rather than confusion. Traders, investors, and central bankers everywhere awoke on Thursday to the news that the Swiss National Bank was abruptly abandoning its policy of pegging the Swiss franc to the euro. By removing the cap, the Swiss are taking a step toward greater austerity, allowing their currency to appreciate instead of being (somewhat artificially) dragged down by a tumbling euro. This is precisely what is expected to happen when the European Central Bank moves toward purchasing the sovereign debt of EU member nations at the bank’s next policy meeting. Estimates of the size of the stimulus have been in the ballpark of €500 billion. Prior to the policy change, analysts were nearly unanimous in their expectation that Switzerland would refrain from unleashing the Swiss franc, as it were, for at least the next year or two. The importance of the move lies in its implications for the European markets; rather than wondering if and when the ECB would officially implement purchases of fledgling government bonds, the decision by the SNB appears to be a clear signal that this proposed measure is now a certainty. The euro declined to an 11-year low against the dollar (just above $1.15), while European stock indices shot up over 2%. Such a response would seem to indicate, at least in the minds of market participants, that ECB QE is a-comin’. Prior to the shockwaves created by the SNB, the equities markets were aimlessly trying to find their way amid the backdrop of an uncertain world economy. Tuesday morning saw U.S. indices spike, with the Dow Jones Industrial Average adding over 300 points, before Germany announced it had balanced its budget for the first time in nearly five decades. This was taken as a ringing triumph for austerity, prompting traders and investors to connect the dots about Germany’s consistent intentions to block the ECB’s pursuit of quantitative easing. The Dow cratered on the news, dropping over 100 points into the red for a dramatic 424-point intraday swing. The dollar remained strong, staying above 92.0 on the DXY spot index, despite the Japanese yen reclaiming some ground against the greenback. After sliding as low as 120 to the dollar in recent weeks, the yen bounced back to around 116 per USD. While both the dollar and the yen are considered safe havens, the Swiss franc has long been the ultimate safe haven (among the fiat currencies, at least). Once its euro cap was removed, the franc rose rapidly to a record-high against the euro before easing up. The real beneficiaries of safe haven demand were the precious metals, which jumped to their highest levels of the new year. Silver moved back above $17/oz after falling in tandem with copper earlier in the week. (Most newly-mined silver is a byproduct of copper mining.) Palladium dramatically tanked in the second half of the week, tumbling from above $815/oz on Wednesday’s open to $750/oz by Friday. Most analysts cited the plunge in copper prices and the wobbly global economy as the reason for palladium’s freefall, though this was the outlier among the metals. Meantime, gold and platinum surged over $40 each on Thursday, placing both metals in the $1,270/oz price range. Not only are gold and platinum in somewhat unusually close parity with one another, but the former actually overtook the latter in early trading on Friday. This marks a seven-day string of gains for gold, which is beginning 2015 on a winning streak similar to its beginning of 2014. The yellow metal ultimately ended last year flat in terms of dollars. It stands to reason that those worried about the shaky character of the markets would move funds into precious metals, because there’s essentially nowhere else to go in the bond markets. All of the safer bets in sovereign debt are yielding peanuts, while higher-return emerging market bonds are becoming increasingly illiquid. U.S. Treasuries keep rising, with yields on the 10-year note falling like a rock through the 1.90% threshold, all the way down to 1.75% by Friday’s open. The 30-year bond yield also hit an all-time low of just 2.39% before bouncing. Continue Reading>>>

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