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Europe thrown into turmoil as Swiss let franc soar
[LONDON] Global markets were thrown into turmoil on Thursday as a shock move by Switzerland to abandon its more than three-year-old cap on the franc sent the currency soaring and Europe's shares and bond yields tumbling.
The franc jumped by almost 30 per cent in a chaotic few minutes after the 1.20 per euro cap in place since late 2011 was lifted, surging past parity to trade as high as 0.8052 francs per euro.
It had settled back at 1.02600 as the start of trading on Wall Street approached having shattered any hopes investors had had of a calming of the recent market volatility.
Oil prices continued to whip-saw around, staging an early afternoon rally in Europe along with bruised metals markets while Wall Street also opened 0.4 per cent higher have turned around earlier expectations of a fall.
Company results were picking up momentum as a hit from legal costs to banking giant Citigroup's earnings was balanced by better-than-expected numbers from Blackrock.
But the central focus remained the drama in Switzerland.
Over 100 billion francs (US$98 billion) was wiped off the value of Swiss stocks, their biggest daily fall in 26 years, while the euro slumped to a new 11-year low against the dollar as it fell below US$1.17. The cap had made the SNB one of the few buyers of euros in recent months.
The pan-European FTSEurofirst 300 returned to positive territory but the early investor scramble for safe-haven assets meant there were new record low yields for Germany's government bonds and gains for the yen and gold.
"This is extremely violent and totally unexpected, the central bank didn't prepare the market for it," said Alexandre Baradez, chief market analyst at IG in France.
"It's sparking panic across all asset classes. It suddenly revives the risk of central bank policy mistakes, right when central bank action is what's keeping equity markets going."
The view among traders was that the Swiss central bank must have felt it could no longer hold out against the tide of money coming its way as the European Central Bank prepares to start quantitative easing and investors pour out of riskier markets such as Russia.
In a news conference to explain the move, SNB Chairman Thomas Jordan said the bank was now looking "at the exchange rate situation as a whole," and would remain active in the market if necessary.
Adding to the nervous mood, oil continued to yo-yo. Brent crude fell back to US$47.50 only to rebound to back to almost US$49 a barrel as copper and other metals also clawed back some of the big falls they saw on Wednesday.
The Swiss move, which also saw interest rates cut deeper into negative territory, continued to send shockwaves far and wide, however.
Hungary's forint hit a record low as eastern European currencies and the region's bank shares also took a tumble. The dollar extended its gains against most major currencies also the lingering Swiss jitters kept it lower versus the yen.
Before the drama, markets had appeared to be settling after turbulent few days, especially for commodities.
Asia stocks had risen after India's central bank yielded to signs of slowing inflation and delivered a surprise interest rate cut, while Germany confirmed its economy - Europe's largest - grew 1.5 per cent last year despite a weak finish.
Copper clawed back 1.5 points of the 5.3 per cent it lost on Wednesday, its biggest fall since 2011. "It is a period of huge confusion and you are seeing these really big seismic moves in markets," said Nick Lawson, a managing director at Deutsche Bank in London.
"These kind of wide swings deter investors rather than encourage them."
"The threat of oil going to US$30 a barrel is more important than what happens at the ECB next week. The implications of that is what is really in the headlights at the moment."