The headlines this morning are dominated by the unexpected move by the Swiss National Bank to remove its cap on the Swiss franc against the euro, as well as cutting its deposit rates. Analysts and economists unanimously expected such a change to come farther down the road, perhaps in 2016 or 2017. The measures are intended to protect the Swiss economy and its currency, the Swiss franc, which has long been a popular choice for investors to put their money in times of crisis. The surprising timing of the central bank’s decision would seem to signal that the Swiss are worried about the devaluation of the euro that is likely to come with the ECB’s impending stimulus plans.
Yesterday in the Markets
Gold rose again on Wednesday, but silver fell from its recent highs on the plunge in copper prices. (Most mined silver comes as a byproduct from copper mines.) Volatility was up in the markets, as has increasingly been the case lately, on yesterday’s options expiry.
Factors Affecting Gold Today
The “Swiss Surprise” has markets feeling shaky, as any unexpected development tends to do. The implications of the move, however, are also a bit frightening for investors, as it likely signals that the Swiss are not particularly keen on monetary stimulus by the ECB, siding with Germany and austerity. Heretofore Switzerland (and the Swiss franc) have widely been viewed as a safe, reliable economic haven; by abandoning their cap on the franc, the Swiss seem to be anticipating some serious economic pains for the stronger members of the EU as they attempt to do “whatever it takes” (in the words of ECB President Mario Draghi) to keep the currency union together.
Swiss stocks fell significantly following the SNB’s decision on the expectation that the franc will rise, hurting the country’s exports. The Swiss franc did jump considerably following the news, but euro area equities also spiked, interpreting the move as proof positive that the ECB will implement some significant form of sovereign debt purchases from struggling member nations. France’s CAC 40 index and the Euro Stoxx 50 were both up over 1.6% this morning, while Germany’s DAX index rose by 1.86%. U.S. equities fared worse, as all three indices were moderately in the red this morning before trending back toward unchanged.
The drop in U.S. stocks also had to do with economic news on the domestic front. Jobless claims rose to a 4-month high unexpectedly, and the Producer Price Index saw its biggest drop in 3 years. Crude oil prices tried to stage a nice recovery this morning, as both major benchmarks vaunted back above $50 briefly before relinquishing almost all of their gains. The price movement did actually push West Texas Intermediate above Brent crude, which hasn’t been seen in almost 2 years. 10-year Treasuries remained in demand, holding down yields to just 1.84%. Looking abroad, India’s stock market, bond market, and currency (the rupee) got a boost from the central bank cutting its repurchase rate. Similarly, China’s Shanghai index jumped over 3% on the country’s expansive growth in bank credit.
With all of the uncertainty, volatility, and surprises, gold prices have been the beneficiary. After again posting gains on Wednesday, gold shot up over $30 on Thursday morning in response to the SNB shocker. Platinum also surged by about the same margin, maintaining its close parity with its yellow cousin in the $1,260-range. Silver also gained about 1% after yesterday’s drop, pushing back about $17/oz. This latest rally may very well be temporary, based on fleeting investor fears about how the world economy will react to the current deflationary environment. If those fears are not fleeting, however, the precious metals could see prolonged safe haven demand until markets normalize.
Tomorrow’s important economic data includes the Consumer Price Index (CPI) and industrial production for December, consumer sentiment for January, and Treasury International Capital data for November, the latter providing a measure of investment inflows and outflows from the U.S.