|Dow||-106.38 to 17,320.71|
|S&P 500||-18.59 to 1,992.68|
|Nasdaq||-68.50 to 4,570.82|
|10-YR Yield||-.062 to 1.775%|
|Gold||+$23.80 to $1,258.30|
|Crude Oil||-$2.31 to $46.16|
I’ve seen a lot of crazy moves in my almost two decades of following the markets. The Long-Term Capital Management crisis in 1998. The dot-com bust and Nasdaq crash in 2000-02. The housing collapse and credit market implosion in 2006-09.
But I’ve never … ever … seen anything like what just happened in the currency market. In a move that utterly shocked traders from one end of the globe to the other, the Swiss National Bank abandoned its “peg” for the Swiss franc. It simultaneously said it would cut deposit rates to a whopping negative-0.75 percent from the previous negative-0.25 percent.
The move came as a complete surprise because the SNB had been maintaining a minimum level of 1.20 francs to the euro since September 2011. Or in other words, it promised that one euro would buy no fewer than 1.20 francs — and would defend that peg “with utmost determination.”
The supposed goal was to prevent Swiss deflation. But the SNB’s balance sheet was growing by leaps and bounds as a side effect. It had to print francs out the wazoo and buy up billions of euros to maintain the peg.
That swelled its foreign currency hoard to the equivalent of a record 495 billion Swiss francs as of late 2014. But with Euro-QE likely right around the corner, policymakers realized the jig was up. They just couldn’t keep defending the 1.20 level. So they threw in the towel.
The result was swift and severe. The euro plunged to the point it bought less than 0.90 francs in a heartbeat. Just look at this chart, and you can see the implosion in the EURCHF exchange rate (at the far right) is absolutely unprecedented!
|Click chart for larger version|
The Swiss stock market also tanked more than 10 percent amid fears the move would eviscerate earnings for Swiss exporters. And benchmark, Swiss interest rates fell further into negative territory — with 10-year note yields sinking to minus 0.014 percent.
But if you’re not a currency speculator who just got destroyed shorting Swiss francs …
If you’re not planning a ski trip to the Swiss Alps, and your lift ticket suddenly got much more expensive …
And if you don’t own something like the iShares MSCI Switzerland Capped ETF (EWL), which rose almost 4 percent today because the Swiss franc rallied sharply against the buck as well as the euro …
Why should you care? What does this move mean to you?
First, as I noted, the dollar tanked against the Swiss franc in the wake of the move. It also got clocked against some other currencies that it had been crushing, including the Australian dollar, New Zealand dollar and Canadian dollar.
|Swiss franc soars as central bank shifts course.|
With U.S. dollar sentiment so bullish lately, and sentiment on those currencies I just mentioned (as well as the Japanese yen and euro) so negative, this is just the kind of “shock and awe” move that can change trends in a big way!
Heck, I warned of exactly this kind of risk literally two days ago. And I just recommended my Safe Money Report subscribers bag a sizable 33 percent profit in nine months on a currency-related trade because of it.
[Editor’s Note: Want to get your hands on Mike’s “buy” and “sell” signals”? Just click here.]
Second, the rising dollar has been a key force putting immense pressure on the prices of commodities and precious metals. That’s because they’re priced in dollars, and tend to trade as “contra-dollar” assets.
But this SNB move puts one stake in that dollar rally. And it’s entirely possible that traders will “sell the news” of a European Central Bank QE program if it’s announced next week. That’s because they’ve already “bought the rumor” of a program by driving the euro down to 1.17 against the dollar from 1.40 just last spring.
Result: We could see the dollar tank, and commodities soar, in a vicious counter-trend move. The precious metals market already appears to be sniffing that out, by the way. Gold just hit $1,261 an ounce earlier today, up more than $120 from its November 2014 low and a four-month high!
Third, these moves could change the leaders/laggards makeup of the U.S. stock market. We could see sectors that were rocking and rolling — airlines, retailers, real estate, utilities, etc. — take a breather, and sectors like miners, materials and energy pick up the baton and run. That would come as a big surprise, considering how much doom and gloom we’ve heard about energy and other related investments.
Finally, this move by the SNB should underscore a point I’ve made for some time. You can’t trust central bankers further than you can throw them! They can promise you the moon and the stars — say they’re going to keep rates low … raise them in a few months … maintain the value of your currency at a certain level … or just about anything else.
|“We could see the dollar tank, and commodities soar, in a vicious counter-trend move.”|
But they’ll go back on their word as soon as it suits them, and as soon as the data prompts them too. So if you’re positioned in any market solely on the promise of a small group of Ivory Tower economists and bureaucrats, you’re taking your financial life into your own hands.
Now, here’s another recommendation for you: Hop on over to the Money and Markets website and get talking about this Swiss Shocker. Do you think it was a smart move or a dumb one, and why? What impact do you anticipate it’ll have on the currency market, or on your own investments?
And what about central bankers in general? Are they now a destabilizing force, rather than a positive one for asset values? Let me know!
|Our Readers Speak|
In the wake of yesterday’s column on the ongoing legal fiasco enveloping U.S. mega-banks, many of you said they brought it on themselves. You also said it’s (sadly) unlikely to change!
Reader Bob S. said: “Some years ago, the retiring Attorney General of Oklahoma opined that the law profession could profile its ideal client: Rich. Stubborn. And Wrong.
“Anyone too hard-headed to admit an ethical lapse will continue to be wrong and won’t learn from the litigation in which he gets dragged, that he needs a better way to earn a living. If he also has money, he will spend it on lawyer fees. The behavior continues until the money is exhausted.”
Reader Ron Ray M. added: “If bankers were not such big crooks, they would not need all the lawyers. However, one of the primary jobs of the lawyers is to figure a way to skirt the laws so jail is not an option. Looks like they are doing a good job. Bankers and lawyers rarely go to jail.”
Meanwhile, Reader Mike McD. noted that the mega-banks are making life harder for their smaller competitors by screwing up the whole regulatory environment. His take:
“The actions of some are pushing costs onto many. JPM, Citi, BofA and others have caused — and continue to cause — so much pain on the industry. Even the good guys like BB&T are experiencing higher legal and compliance costs due to all the new regs and other often misdirected government oversight.”
Finally, Reader Al McN. offered his opinion on the best solution: Make banks get back to basics! His comments:
“The U.S. needs to completely revamp the banking system. The system should be designed so that banks lead much simpler financial lives. They should evaluate risk and loan money period.
“Allowing banks to trade for profit is absurd. They can and do rig markets. Plus, they distort evaluation of value through derivatives, which make virtually any entity who trades them not understandable.”
Thanks for the comments. I agree that we’ve gotten far away from the traditional banking model, and that it was a huge source of turmoil during the credit crisis. The revolving door between banks and bank regulators, where public servants toil away for a few years in Washington solely for the purpose of securing cushier, higher-paying Wall Street jobs afterwards, is another major problem.
Am I forgetting anything? Want to weigh in on the debate? Then head on over to the website and add your thoughts!
|Other Developments of the Day|
Looking to buy and light up a Cuban cigar … legally? Well, thanks to new measures being put in place by President Obama on Friday, you can. Business travel to Cuba will also become easier, as will the sending of money back to Cuban relatives for U.S. Cuban ex-pats.
Did you get a load of the moves we just saw in crude oil? The price of oil reversed course in the afternoon yesterday, surging 5 percent from its lows. Then it spiked as high as $51.27 this morning … before falling back to the low-$46 area.
I don’t know if this extreme volatility is a sign we’re very near to THE bottom. But what I do know is everyone and his sister is short oil and oil stocks, and sentiment is massively negative. So all you need is a spark to start one heck of a fire!
On the earnings front, two more mega-banks whiffed in the wake of JPMorgan Chase (JPM, Weiss Ratings: A). They include Citigroup (C, Weiss Ratings: B+) and Bank of America (BAC, Weiss Ratings: B-).
Citigroup profit plunged 86 percent to $350 million, or 6 cents per share, in the fourth quarter from $2.5 billion, or 77 cents per share, in the year-earlier period. Revenue was flat, but earnings got hammered by $3.5 billion in charges for … you guessed it … legal costs (and other expenses)! Bank of America earnings dropped 14 percent, hurt in part by yet another $393 million in legal expenses and a plunge in sales and trading on Wall Street.
Oscar nominations were announced today, with movies like “Birdman” and “Boyhood” leading the way with the most accolades. They’re also movies I’ve never heard of, and will almost certainly never see! In my experience, that’s par for the course with Oscar nominations. Oh well.
Remember: The website is there for you to comment at any time. Enjoy!
Until next time,