Volatility back with a bang

January 16, 2015

The logo of the SNB is seen at the entrance of the SNB in Bern

Volatility is back with a bang.

The Swiss franc leapt by an unprecedented 40 percent at one point after the Swiss National Bank scrapped its currency cap out of the blue. Oil may have bounced but it’s still down the thick end of 60 percent since mid-2014, dragging the rouble and other oil-producer currencies with it. Copper, generally a barometer of world industrial demand, is barely finding its feet after plunging this week.

What does it all mean? Well it certainly makes life harder for companies exposed to those currencies or those commodities. It also shows that a period of central bank-inspired wobbles is probably upon us with divergent policies testing the fabric of financial markets and the world economy.

What made the SNB shift from having the cap as its policy “cornerstone” on Monday to abandoning it on Thursday? That’s the key question.

It seems that it didn’t tip off other major central banks and monetary authorities beforehand – IMF chief Christine Lagarde said she had no clue it was coming and was surprised not to get a heads-up – so the conspiracy theory that the European Central Bank gave the Swiss the nod that it was about to print an avalanche of euros should be taken with a pinch of salt.

Aside from the SNB yesterday, India surprisingly cut interest rates in response to oil-depressed inflation, and the ECB – tip-off or not – is on the cusp of launching quantitative easing. A first U.S. interest rate rise is still expected around mid-year despite evaporating inflation.

It all adds up to a jittery spell. Lagarde said the global prognosis was bleak despite solid U.S. growth and much cheaper energy.

The ECB will state today how many billions of euros banks will repay of loans taken out at the height of the euro zone crisis in late 2011 and early 2012. This is important as Mario Draghi has pledged to expand the size of the ECB’s balance sheet – a measure of how much money it is pumping into the economy – by up to 1 trillion euros.

With this money coming back into ECB coffers, the balance sheet is actually shrinking. It fell last week for the same reason. That means it is virtually impossible for Draghi to reach his target without a full government bond-buying programme with new money.

The plus for the ECB, is that the Swiss action has pushed the euro down even further against the dollar and other major currencies, which should help push up both inflation and exports.

Given the febrile atmosphere in markets and economic problems in many parts of the world, if Draghi doesn’t announce something dramatic after next Thursday’s policy meeting, we may be into a whole new level of volatility. Greek elections three days later could fuel that further.

Bundesbank chief Jens Weidmann is still doing his best to put the brakes on, saying last night that a European Court of Justice judgment that paved the way for fresh money printing in fact showed the ECB was subject to legal limits on its action.

Sources have told Reuters that in an attempt to meet German concerns about risk-sharing, the ECB may adopt a hybrid approach; buying debt and sharing some of the risk across the euro zone while national central banks make separate purchases of their own. The programme may be limited in size to 500 billion euros. That doesn’t look like enough to satisfy expectations.

U.S. Secretary of State John Kerry will talk with French President Francois Hollande about tackling terror and Hollande will also meet European Commission President Jean-Claude Juncker.

National Front leader Marine Le Pen, will present proposals in response to the attacks in which three now-dead assailants killed 17 people in attacks on the Charlie Hebdo satirical journal and a Jewish supermarket.

Belgian police killed two men who opened fire on them during one of about a dozen raids on Thursday against an Islamist group that federal prosecutors said was about to launch “terrorist attacks on a grand scale”.

A third man was detained in the eastern city of Verviers. All three were citizens of Belgium, which has one of the biggest concentrations of European Islamists fighting in Syria.

Norway’s prime minister, central bank governor and finance minister hold a rare meeting to discuss economic developments. With crude prices falling below $50, Norway’s prospects are dimming though the bank and the government both said there was no need yet for emergency stimulus measures.

We may get a slew of credit ratings reviews today with, Germany, Greece, Luxembourg, Ireland and Poland all potentially in the spotlight.

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