Is the SNB losing the battle against the strong franc?

Equity Indices Subdued going into weekend.
by Brenda Kelly

A fairly subdued morning for European equity indices with most barely getting into positive territory as Asian markets, particularly China failed to make any decent upside. Again, the consumer staples and discretionary sectors are helping to keep the FTSE balanced. It’s this level of caution that we’ve been witnessing over the past number of weeks that tends to imply that the highs for this year are behind us.

Even with Greece taking up the headlines yet again, we all want to believe that the Eurozone is able to forge ahead with its recovery. This may be misplaced in light of the very weak employment numbers coming from Italy this morning. A rise to 12.7% unemployment against an expectation for a lower 12.3% would indicate a fairly bleak picture. Recent research by the IMF estimates that the jobless rate will not recover to pre-crisis levels for 20 years. At the end of 2007, before the start of the economic crisis in Europe, Italy's unemployment level stood at 6.1 percent. Now it has more than doubled, with youth unemployment even weaker at 42.6% of under 25s unable to find a job. Unless there is a significant improvement in Italy's economic growth rate it may languish further. The unemployment levels remain much higher than the composite figure of 11%.

News that Eurozone core CPI rose to 1% year on year may impact ECB QE plans. It’s still well below the mandated level but has still managed to send the euro slightly higher against the dollar this morning.

Equities Highlights:

ITV (1.84%) Liberty Global has increased its stake in the broadcaster to 9.9%. This additional stake has a value of around £380m but there are no plans for a full takeover offer. Liberty clearly do not agree with the downgrade from Deutsche Bank earlier this month which cited increased competition and weakness in ITV’s online space for the decision.

Lloyds (-0.73%) A 15% increase in underlying H1 profits to £4.4bn is certainly nothing to sneeze at as well as the interim dividend of 0.75p per share which will deliver some £535m to some very patient shareholders. The introduction of a dividend is well timed and will make it much easier for the government stake disposal in due course. PPI claims remain a thorn in the side of the bank which has set aside a further £1.4bn for future litigation. This brings the total to £13m, the highest of all the UK banks.

Intercontinental (-3.61%) A 4.6% move up yesterday in the share price has been swiftly negated this morning as the firm has denied any merger talks with Starwood Hotels.

Antofagasta (1.46%) The mining company has purchased 50% of the Zaldivar copper mine. The strategic rationale for the move is as yet unclear but could pave the way for acquiring positive cash flows to offset issues elsewhere.

IAG (+1%) A big jump in quarterly profits to €449m for the three months to 30 June has helped the stock to lift higher today. Currently in the process of buying Aer Lingus, the group await approval from Ryanair. CEO Willie Walsh has reiterated guidance for the FY which is expected to be above €2.2bn.

BG Group (+0.74%) Q2 results beat expectations. Net income fell 65% to $429 million from a year earlier, and the company has also raised its 2015 production forecast to the upper range of its guidance. The stock has gained 19% since the Shell acquisition was announced, after falling 33% last year. Average broker target price is 1303p implying a 17% upside.

Later sees the Chicago PMI released which is expected to marginally better than the last outing, and should print higher than 50.

Is the SNB losing the battle against the strong franc?
By Ipek Ozkardeskaya

Swiss National Bank announced a record loss of 50.1 billion francs in the first half of the year. A decent 47.2 billion franc worth of loss has been reported in foreign exchange operations, against a tiny 530 million franc revenue from the negative interest rates.

The SNB’s poor financial performance has not been a surprise per se, given its decent euro exposure as it abandoned the euro-franc floor in January 15. The SNB kept on intervening actively in the foreign exchange market to prevent undesired franc appreciation. The negative rates has certainly been efficient to cool-off the investor appetite in franc holdings, nevertheless the social costs of negative interest rates has become an important issue on the political platform, as Swiss households saw their savings flat while the pension funds had somewhat difficulties to generate return.

As the SNB has little manoeuvre margin on its policy rate strategy, the foreign exchange interventions remain the main option to prevent the franc from strengthening. Unfortunately for the SNB, the cost of fighting against the franc appreciation is becoming sustainably high. And given that the SNB pays dividends to cantons and to the Confederation, financial losses bring once again the politics in the game. At these times of economic slowdown, Swiss cantons need cash for public spending in order to sustain the economic activity. Unexpected costs on cantons’ budget is all but needed nowadays.

SNB has got its hands tied

Surrendered by all sides, each centime lost weighs on SNB’s ability to fight the strong franc.

As kneejerk reaction to SNB results, the franc gained some its post-FOMC losses back. The US dollar cheapened from 0.9696 to 0.9627. Euro is back on its way toward the SNB’s implicit 1.05 trading range base.

Whether the SNB should continue expanding its poorly performing balance sheet or let the market decide how strong the franc should be, is a big challenge for the new SNB’s new Governor Andrea Maechler.