US stocks are looking to open slightly higher today as investor expectations for a QE programme from the European Central Bank hardened following the shock move by the Swiss National Bank to abandon its peg to the euro.
Futures were volatile in wake of the SNB’s move this morning but at 12:30pm they were indicating S&P 500 will open four points higher at 2,015, with the Dow Jones ahead 33 points higher at 17,460. Nasdaq is seen gaining Nasdaq five points higher at 4,150.
The hugely surprising move by the SNB led to the Swiss franc soaring 30%, sending the currency from the 1.20 to the euro it was pegged at, to 0.8052. At the same time as abandoning its euro peg, the SNB slashed a key interest rate from -0.25% to -0.75%, increasing the amount investors have to pay to hold Swiss deposits.
Jasper Lawler, analyst at CMC Markets, says the move by the SNB means it “must have a very strong inclination that the European Central Bank is about to begin a large scale quantitative easing programme which would act to depreciate the euro and make a defence of the Swiss franc peg impossible”.
“This is the strongest signal yet that QE from the ECB is on the way, so while equities may tread negative territory on concerns about the possible fallout, that may not last long considering the prospects of a fresh bout of liquidity from the ECB which would boost risk-taking.”
Investor worries of a fallout from the move are perfectly understandable as Switzerland is major financial centre: the Swiss franc is used in multiple financial instruments and has been used as a funding currency to buy higher yielding assets.
The SNB has had its 1.20 peg in place since 2011 in an attempt to prevent an appreciation of the Swiss franc to defend its export market. “As it has turned out [with the developments today] 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,” says Lawler.
He adds: “Looking beyond Switzerland, this is the first example since the financial crisis of a central bank failing at its attempted intervention in the market. One could extrapolate the Swiss experience to the US and question whether the Fed preventing a deeper recession in 2008 has perhaps delayed the inevitable and made prospects for the next recession that much worse.”
Commenting on the impact of the move on the Swiss economy Evelyn Herrmann, an economist at BNP Paribas, says: “The appreciation of the franc now means lower import prices, increasing downward pressure on Swiss inflation, and will challenge Swiss exporters’ competitiveness, at least for those exports going to the eurozone (around 55% of all exports).”
The huge currency movement triggered by the SNB’s move seems unprecedented. As Michael Hewson, chief market analyst at CMC, says: “It’s pretty extraordinary. Certainly I can’t remember anything like it and I was around in 1992 when UK came out of ERM.”
Hewson reminds that that when the Swiss National Bank brought in the 1.20 peg against the euro four years ago in an attempt to prevent safe haven flows at the height of the euro crisis, there was an awful lot of scepticism that the bank would be able to defend it within any success.
“That the peg has lasted as long as it has is probably more to do with the fact that the European Central Bank has found it extremely difficult to ease policy as quickly as it would like in the face of German opposition to a full scale bond buying programme.”
He notes that history in any case shows currency pegs usually have a limited shelf life – as the UK found out to its cost on numerous occasions in the 1980s and the 1990s, when it pegged its currency to the deutschemark: “There was, therefore, always the prospect that the removal of the peg [by the SNB] would end in tears.”
While the fallout from the SNB’s move is hard to quantify, Hewson reckons there will be much more volatility in markets as investors try and work out what the sudden change in SNB’s policy means for future central bank promises. “It seems likely the US dollar could well benefit, as well as gold, as investors look again at the more traditional havens.”
He adds: “This morning’s moves also highlight how fragile financial markets still are nearly six years after the financial crisis despite trillions of dollars of central bank largesse and the risk is that markets start to lose faith in these new masters of the universe as investors look at central bank promises with large dollops of scepticism.”