Rich bank’s poor quarter
By Arnaud Masset
The Swiss National Bank reported a substantial loss for Q1 2018. Despite pocketing CHF 3 billion in dividends and interest and CHF 0.5 billion in revenue from Swiss franc positions, the central bank lost CHF 3.9 billion on its bonds, CHF 3.3 billion on its equities and CHF 0.2 billion on its gold. Moreover, the CHF’s appreciation produced a foreign exchange loss of CHF 2.8 billion.
An interest rate surge in the Eurozone and the US, coupled with turbulent equity markets, have hurt the SNB. However, Q2 will most likely be more favourable, because the CHF extended losses against all its G10 peers, falling 2.9% against the greenback, 2.15% against the pound and 1.8% against the euro. Equity markets are more balanced: Euromarkets have recorded solid performance in April, while US ones have not moved much. Unfortunately, bond prices are set to fall, as interest rates are rising on both side of the Atlantic.
What will Draghi do?
By Peter Rosenstreich
He’ll walk a tightrope: today’s European Central Bank meeting is expected to generate no change in policy or communications. Weak economic data have some observers talking down ‘normalization’. Indeed, there is speculation of an increase to the current €30-billion bond-buying programme. Subdued inflation is unlikely to improve by June, due to a stronger Euro and slower growth. However, we think this is a smoke screen.
Despite efforts to create the appearance of two-way action, there is only one way to go. ECB President Mario Draghi will clearly dance at today’s press conference to keep the market guessing and not provide a bullish signal for EUR. He will be less dovish than on 18 March, but he will downplay expectations for inevitable policy tightening. We anticipate July will bring details for deceleration of asset-buying, from €30 billion to €15 billion in October and to zero by yearend. Given our view that US 10-year treasuries have topped at 3.01%, we are positioning for a EUR/USD rally.
Why? First, the current slowdown is global and transitory. French and German purchasing data have already indicated a pick-up. Second, conditions in Europe have improved. The transition from economic recovery to expansion continues, with GDP growth expected at around 2.2% for the Eurozone. That hardly justifies negative interest rates and extended asset purchases. The ECB needs to get rates off the bottom and end ‘helicopter money’, in case a real crisis demands real action. A central bank needs tools, and now the ECB’s are completely tied up. Besides, free money is not necessarily good for the real economy and encourages excessive risk taking. The ECB knows this, and Sweden’s central bank decisions to keep policy unchanged and keep dovish bias only highlights the disconnect between action and results.