International Forecaster Weekly

Adding Up the Swiss Franc Fallout

... however the SNB fallout lands and whoever it lands on, it's not doing anything to help the bleak outlook for a world on the edge of deflation.

James Corbett | January 21, 2015

After the Swiss National Bank's surprise removal of the franc floor last week, market chaos reined. What does this mean? Who is going to go belly-up? Where will investors run for cover and how long will they stay there? That picture is becoming only partially clearer this week as the fallout from that decision begins to be tallied.



            Among those things which are clear: gold and silver have returned to 5-month highs as investors decide that precious metals are one safe haven to ride out the current storm.

            Also clear is that Poland is on the front line of the Swiss currency tsunami, with 575,000 Poles having been seduced into $35 billion in Swiss franc-denominated mortgages in recent years by the siren song of low rates. Now that the bet against the franc has blown up in their face, a very concerned Polish citizenry is demanding government bailouts, and the Deputy Prime Minister has appeared to put support behind the idea if the franc “remains above the 4 zloty level.” The Central Bank governor, on the other hand, is warning against such a move.

            Another point of clarity: however the SNB fallout lands and whoever it lands on, it's not doing anything to help the bleak outlook for a world on the edge of deflation. The IMF has just lowered its global growth forecast by the largest amount in 3 years, pointing to “complex cross-currents” in the global economy from weak investment prospects in the Eurozone to credit risk in China and crises in Russia and elsewhere. Although the report didn't mention the franc specifically, the shadow of last week's shockwave hangs over the forecast.

            But when it comes to stocks, a number of events are competing for investors' attention. As we discussed in these pages last weekend, the Swiss move sent markets tumbling across the globe late last week, but we've seen rallies this week in that “new normal” phenomenon of bad news giving rise to hopes for increased liquidity, this time in the form of ECB stimulus. Asian markets also rose on news that China beat expectations for GDP growth on the latest data, although the market lift was negated somewhat by the fact that this was still the slowest GDP growth in China in 24 years (even by the government's own cooked books). US markets were shut for the long weekend on Monday, so it remains to be seen as of press time how the DOW and S&P are going to process this information.

            For now, all eyes are on the ECB, where Mario Draghi is expected to announce quantitative easing, European-style. Whatever is (or is not) announced on Thursday, you can bet it is going to have a huge effects on the markets. There is very little upside potential from any announcement as a trillion dollar stimulus has already been priced in by investors. This means that there's only one way for markets to go if the stimulus is seen as too little or too late: down.

            More so than the size of the stimulus, though, all eyes will be on how it is structured. How much stimulus will come from the ECB and how much will be expected from national central banks? The structure of this stimulus could very well determine the fate of the European Union, let alone the markets. Once again, investors are playing wait and see while the fate of the world as we know it seems to hang in the hands of another unelected central banker. How will it play out? Stay tuned...