Category Archives: Central Banks

ECB data shows Italy, France, Greece, Spain most active propping up their bond markets

Looking at this data showing central banks most active propping up bonds in the euro area and the comparing to what “pure play private banks” like Julius Baer hold on their balance sheet does make you wonder about the sustainability of the ECB purchases and what effect it has on the bond market.


The data below shows what Julius Baer invests billions in. Especially debt instruments and there financial institution bonds caught my eye.

Julius Baer
Financial investments available-for-sale
Money market instruments 2’723.00 15.65%
Debt instruments 14’518.00 83.45%
Government and agency bonds 3’411.30 19.61%
Financial institution bonds 6’406.30 36.82%
Corporate bonds 4’649.40 26.73%
Other bonds 51.00 0.29%
of which quoted 13’532.50 77.79%
of which unquoted 985.50 5.66%
Equity instruments 155.80 0.90%
of which quoted 16.10 0.09%
of which unquoted 139.70 0.80%

SMI – no recession priced


Looking at the above chart and comparing the current move to what we saw in 2008 and 2009 I believe the reaction so far is much too weak to signal a bottom.

It’s more likely to be a drawn out process of sideways without negative news, then down on actual impact of heavy handed EU reactions.

Should the EU make Britain a good deal, then we’re off to the races again. But I would not consider that most likely, even though it would be best for the world economy. Sadly it wouldn’t be good for socialist or left governments, which is why I am afraid we’ll see them hurt their countries.

Why free movement of people (leading to work hotspots and countries) has to be one of the cornerstones of the EU when modern economies that can network their offices, use robots, telecommute, telework, etc, is  beyond my comprehension. But that’s politics. The charts (graphic form of what people think), tells me they are not expecting anything really negative in Switzerland and see the index as a safe haven.

We’re in year 1 of 3 years of growth trouble, is my current feeling. Even if the central banks can and will put a floor in asset depreciation. I’m not convinced they have a magic wand to improve profitability and dividends. They can prop up bonds and give them fairy price levels. And the SNB can fight CHF strength. But the SNB can’t save the EU on it’s own.

SNB: Credit Suisse and UBS need to take action

From the SNB Stability Report

At the end of the first quarter of 2016, both big banks were fully compliant with the initial TBTF2 phase-in requirements, which come into effect on 1 July 2016. To meet the corresponding look-through requirements by the beginning of 2020, however, the big banks need to take action – particularly in meeting the leverage ratio requirements and the gone-concern requirements. As regards risk-weighted going-concern requirements, by contrast, both big banks are already almost fully compliant.

However, it is likely that RWA will increase in light of the measures drawn up by the Basel Committee. This expected RWA increase has, as far as possible, been factored into the calibration of the TBTF2 requirements.

[…] Moreover, the Basel Committee has confirmed the 3% minimum requirement for the Basel III leverage ratio and is considering the introduction of a higher leverage ratio requirement for G-SIBs. The reforms are due to be completed and published by end-2016.

[…] First, the big banks’ loss potential relative to their capitalisation continues to be substantial, both when measured on the basis of the losses experienced in the last financial crisis and according to the adverse scenarios applied by the SNB. The highest loss potential results from the US recession scenario, followed by the euro area debt crisis scenario and the emerging market crisis scenario. Second, while leverage ratios at both Swiss big banks have improved by international standards, their Basel III Tier 1 leverage ratios are currently still below the average for large globally active banks.

and further on:

Substantial loss potential
According to SNB stress tests, the big banks’ loss potential under the adverse scenarios is still substantial. The highest loss potential results from the US recession scenario, followed by the euro area debt crisis scenario and the emerging market crisis scenario. In general, the loss potential stems primarily from loans in the US and Switzerland, counterparty exposure from derivatives and securities financing transactions, and equity and bond positions. Irrespective of the scenarios considered, losses can also result from operational and legal risks.


My view:

So it is only a question of time before action needs to be taken and a euro area debt crisis (Brexit and more exits…) would cause high loses relative to capitalisation.


SNB definitions:
Euro area debt crisis

The debt crisis in the euro area re-escalates. Sovereign risk premia for southern euro area member states rise abruptly, resulting in widespread financial and banking stress. Confidence declines and a deep recession spreads across Europe, originating from the southern member states. Stress in the euro area banking sector and financial markets also spills over to the US and Switzerland, triggering a fall in share prices and a widening of corporate spreads. Against this backdrop, the normalisation of monetary conditions is postponed further. The severity of the scenario is guided by the global financial crisis in 2008/2009, but is centred on acute banking stress in the euro area. The recession in Switzerland is deeper than in 2009 and leads to a sharp drop in Swiss real estate prices, in both the residential and commercial sector. The scenario is similar to the euro area debt crisis scenario in last year’s Financial Stability Report.


Baseline scenario
Under the baseline scenario, economic conditions for the Swiss banking sector improve. Economic growth picks up moderately in the euro area, but unemployment stays high in many member states. In the US, growth continues to be robust. Growth in China slows further and some major emerging markets remain in recession. In Switzerland, the recovery continues and unemployment begins to decline slowly after peaking in the second half of 2016.

The first rate Hike Since 2006 puts Fed on historic path – Dow Intraday

Vanguards comment:

As this has been a widely anticipated decision, we do not expect any material impact on financial conditions in the short term. Indeed, we view the Federal Reserve’s decision as an unequivocal positive for both long-term investors and for savers.

In our opinion, those who claim that raising rates is a “policy mistake” that may derail the U.S. recovery underappreciate the still-accommodative stance of monetary policy and the resiliency of the U.S. economy. There is little to no empirical support showing a strong and material link between a 25 basis point rate hike and future U.S. economic conditions given the still-negative real fed funds rate.


Interesting reminder, in Screenshots, of what an asset manager or financial advisor went through today, whilst watching the markets:




Volatility in the aftermath of the SNB decision to lift FX floor on EURCHF

The following two charts illustrate the increased volatility that can be observed since the SNB decision was taken to cancel the floor on EURCHF. Even though the two charts are intraday charts of January 27th 2015. Chart 2 shows that after 9am CET the FX rate is suddenly extremely volatile. At the same the chart 1 shows that the SMI moved up as the CHF strengthend and then also weakened when the EURCHF reversed.

Today the EURCHF FX rate may also have been influenced by the decision of UBS to inform all their institutional clients, that they will have to pay interest on their balances in CHF. Paying banks to look after money. Interesting times!

Here a comment from Rabobanks senior currency strategist:

EUR/CHF – desperately seeking traction
EUR/CHF has traded as high as the 1.0380 area this morning, the firmest level since January 15 which was the day the SNB stepped away from the EUR/CHF1.20 floor. The respite for the CHF coincides with comments from SNB vice president Danthine who reiterates that the SNB is willing to intervene in the market to offset CHF strength. These comments are well timed and may have exaggerated the move higher in EUR/CHF this morning. For the most part, however, the move higher in EUR/CHF appears to be a reaction to short-covering in the EUR ahead of this week’s FOMC. […]

[…] If the SNB are intervening in the market, it would achieve greatest ‘bang for its buck’ by accentuating an existing trend. A less hawkish Fed this week and an adjustment higher in the EUR/USD would potentially allow the SNB a little more traction in moving the EUR/CHF cross rate higher. That said, the SNB would be battling against a very dovish ECB. We see the potential for EUR/CHF to stabilise in the 1.02 area on a 3 mth view, but concede that the outlook for EUR/CHF is still very fluid.


Chart 1: SMI intraday 09.00-12.00 CETequity-volatility

Chart 2: FX intraday 00.00-12.00 CETfx-volatility



Update: January 29th

Here some more graphs of the EURCHF FX rate. Three interesting points in time. This looks like planned intervention. The 9am to 11am time window is often very volatile. If I remember correctly the EURCHF acted in a similar way back wen SNB was intervening around 1.50. It happened in jolts and will affect players on margin. Long term unleveraged players less prone to intervention – or may even be attracted to take other side…

EURCHF-SNB-Intervention-2015-2 EURCHF-SNB-Intervention-2015

Swiss Winners of the SNB Decision January 15th; Phoenix Mecano

If you’re interested in which companies are not suffering as a result of the SNB decision, here’s one:

Phoenix Mecano has lost just 1% as of today (Jan 20th) vs the SMI drop of ~12% (figure 1). If you were to just look at figure 2, showing Phoenix Mecano revenue by country, and knowing the company is Switzerland based, you would assume that they were going to suffer due to the fact that such a huge part of revenue is in Germany. But, as can be seen from figure 3 with the employee location, just a fraction of their employees are located in Switzerland. Many are in Germany, Middle East / Far East, Rest of World. So this is one company that will not suffer from costs rising in Switzerland on a relative comparison.

Figure 1: Phoenix Mecano vs SMI pricesmi-vs-phoenix-mecano-snb-decision-chart-graph

Figure 2: Gross sales by regionphoenix-mecano-gross-sales-by-region-graph-chart-2013

Figure 3: Employees by regionphoenix-mecano-employees-by-region-2013

Commodities Cartel & Central Banks – The Real Market Sharks?

Just to remind the interested reader what a cartel is; this is what wikipedia says:

cartel is a formal, explicit agreement among competing firms. It is a formal organization of producers and manufacturers that agree to fix prices, marketing, and production.[1] Cartels usually occur in an oligopolistic industry, where the number of sellers is small (usually because barriers to entry, most notably startup costs, are high) and the products being traded are usually commodities. Cartel members may agree on such matters as price fixing, total industry output, market shares, allocation of customers, allocation of territories, bid rigging, establishment of common sales agencies, and the division of profits or combination of these. The aim of such collusion (also called the cartel agreement) is to increase individual members’ profits by reducing competition.

Cartels everywhere have one aim, to guard against negative impact on the cartel members material position.

The OPEC for Oil. The Central Bank Gold Agreement for Gold.

Here’s a recent article from the FT (19th May 2014!)


This is why I find it interesting that people; traders at investment banks trying to play alongside these cartels are now being made scapegoats. The high oil prices and high  gold prices are not a result of natural market forces, but clearly, as evidenced by agreements and organsitations at country / central bank level, cartel prices.

It makes you wonder who is really unethical in all these cases the goverments or their watchdogs are leading. It reminds me more of a situation in which small sharks are being culled by order of the larger sharks!


Forces behind the Bid in the Equity Market

In addition to central banks who have been aggressively increasing their equity positions (see my post on the SNB equity position) there are now large pension fund systems that are moving toward more international equity proportions and decreasing their bond portfolio size.

The state pension fund of Japan manages EUR 908 billion (Milliarden). Of that 67% were in bonds, for example Treasuries. The plan now is to reduce that to 60%. In future 12% of the fund shall be invested in japanese equities and 12% in international (foreign) equities. That’s over EUR 100bn each.

The reason behind Japans’ move is one that works across the developed world. It’s not possible to generate the returns needed with bonds. However most pension fund systems have a large proportion in bonds, thus leading to a ticking time bomb of sorts.

Interesting in this contect: The holdings of US treasuries in Belgium (where they are held by Euroclear for large institutions/banks/central banks) has been exploding. This could mean large amounts of US treasuries are being placed so that they can be sold without alerting the US as to which country is actually selling.

The time has probably never been better to sell, considering the printing press is slowing and the price is still inflated…