The aftermath of the SNB’s shock announcement has been surprisingly calm. Within 24 hours we knew about serious losses or even bankruptcies for various FX brokers (RIP more liquidity), and even by the weekend we had started to hear of hedge fund losses. While horrific, with some funds reportedly down 8-10%, it doesn’t seem to have sent anyone under (yet?). Banks are estimated to have lost $2-3bn between them, but given 5 of them just paid $4bn in fines over FX fixing, these kinds of numbers look worryingly manageable.
So that’s it then, isn’t it. No systemic issues. Central banks globally are relaxed. (Except perhaps Poland, where many companies and homeowners had taken on CHF-denominated debt). Stock markets have rebounded. The hunt for yield continues to send bond markets higher. Other currencies remain well behaved, and we have resumed the trends that were going on before the SNB’s decision – namely, buying dollars and selling euros.
Or have we?
There is one part of the market we haven’t mentioned yet. Probably the most important one – and that is Swiss corporates. The most notable response came from the CEO of Swatch:
“Words fail me… Today’s SNB action is a tsunami; for the export industry and for tourism, and finally for the entire country.”
This isn’t just hyperbole from a company that knows it now has a mountain to climb in order to be profitable. A price shift of 30% in a day blows their entire business plan for the year out of the water. The UK newspapers were full of reports that those on Swiss skiing holidays had to pay an extra £1 for their already expensive beer, as if this were some kind of amusing joke. But tourists are no fools – they’ll go where the money takes them. The trouble is, the shift in behaviour takes longer than just 24 hours. Ripping up and re-starting a business plan for a company also takes time. The ramifications of last week’s decision will take weeks and months to manifest themselves.
The way the market has failed to take this into account, and shrugged it all off, has been the modus operandi ever since volatility began to rise last September. There is still plenty of money sloshing around that needs to be put to work, with the ECB adding to the pile with their QE this Thursday (nicely pre-announced by France’s Hollande yesterday).
The Bobby’s dream approach to the increasingly frequent, and increasingly large, volatility bombs is actually more akin to the five stages of grief: Denial, Anger, Bargaining, Depression, Acceptance. The trouble is, we’re still at stage one, Denial. No doubt the losses caused by the SNB will have tipped some into Anger. But that is still far from the end of the process.
To monitor the shift from Denial into Anger, Blondemoney is watching:
1. Emerging Markets – and in particular the bellwether for yield hunters, USD/ZAR. This has settled into a new higher range of 11.40-11.80. A break to the topside and then it really is the end of the mad hunt for yield at any cost. Currently we are in the middle of the range, reflecting the current calm, at 11.63:
2. USD/JPY for any sign of position unwind. We traded down through the 118.80 level but we have headed back up again since the dust has (allegedly) settled. This strikes Blondemoney as another sign of indecision, rather than genuine calm. If we close above and power on higher, then any stress in the leveraged sector is probably over. If we fail, then there is more volatility to come:
3. And this is the big one – GOLD. As Marc Faber said last week, the only real way to short central credibility is to buy Gold. It now looks like its firmly on its way back to 1350, which had been the upper end of the range for the past couple of years. Above that and we should be well onto “Anger”, if not “Bargaining”!
Don’t misjudge the recent market silence as calm. It is indecision, stalked by nerves. It’s very tough to put on new investments when you’ve got two contradictory forces at play: the liquidity boost from ECB and Japan QE, with the volatility spike from ever more shocks and surprises.
Keep your hands on the wheel and your eyes on the road…