The financial world was totally and utterly stunned by the Swiss National Bank’s surprise decision to abolish its three year old policy of capping the Swiss franc against the euro. Bloomberg reports it was only three days ago the SNB would not abandon this policy in 2015, an unsustainable policy that the SNB has spent billions on by defending the cap after its introduction in September 2011.
This dramatic U-turn sent the franc as much as 41% up against the euro, the biggest gain on record, a move that some are estimating can cause “billions of dollars of losses for banks and their customers.” The franc closed up about 17%.
Words such as “total mayhem” and “utter carnage and decimation” were used to describe trading according to Goldman and Deutsche Bank. Trading halts and illiquidity issues faced the markets.
While the outcome of such a dramatic move will be debated and is not yet known, I will make two concrete statements. First, volatility has been greatly increased. And two, the utterly unexpected had occurred.
I believe I should also write the Swiss National Bank also lowered the interest rates paid on some deposits from -0.25% to -0.75%.
I now ask what are the odds Russia could suspend oil and natural gas deliveries to Western Europe to boost prices, a thought that is almost as radical as the SNB abolishing the cap? It is widely believed Russia’s cost of production is around $75/barrel. Approximately 55% of Russian revenues are derived by oil. The dramatic collapse in crude has greatly impacted the Russian Ruble.
According to Bloomberg, the Ruble is down about 50% during the last 12 months, the vast majority of the decline has occurred during the last four months. The Ruble is the second worst performing currency in the world. Only Belarus’s currency has had a greater decline.
As noted the other day, the Institute of International Finance (IIF) estimates at current run rate Russia potentially has between 60 and 90 days before its foreign reserves fall to $330 billion, the level which the IIF says is the fail safe level regarding its $654 billion of total Russian foreign debt.
The IFF states at this level the odds of default increases.
Desperate people/countries will take desperate measures to ensure viability. As noted above, no one expected the Swiss central bank to eliminate its currency caps and Switzerland is nowhere in the shape of Russia. In fact Switzerland is one of nine remaining AAA rate countries remaining. Russia is rated BBB- and all are excepting further downgrades.
Because of great uncertainty, equities again traded lower. If anyone needs to be reminded 2015 is the worst start of trading since 2009.
Last night the foreign markets were mixed. London was up 0.01%, Paris up 0.34% and Frankfurt down 0.05%. Japan was down 1.43% and Hang Sang down 1.02%.
The Dow should open nominally lower as the future seems more uncertain than 30 days ago. The 10-year is off 2/32 to yield 1.72%.
