Swiss stocks plunge as 'crazy' central bank move upends markets

[FRANKFURT] Stocks in Switzerland fell the most on record after the country's central bank gave up its minimum exchange rate - a shock move that sent the Swiss franc soaring against the euro and triggered wild swings in equity markets.

The Swiss Market Index fell 9.5 per cent to 8,321.23 at 1:46 p.m. in Zurich, with volume about 10 times its 30-day average. The benchmark earlier plunged as much as 13 per cent, the biggest decline since 1988.

"It's completely crazy and a shock to everyone," Francois Savary, chief investment officer of Reyl & Cie, said by phone from Geneva.

"Volatility in the currency markets is never very positive, because you add nervousness to a market that is looking for certainties. It makes you unable to forecast profits or economic growth."

The Swiss National Bank ended its three-year-old cap of 1.20 franc per euro and cut the interest rate on sight deposits over a certain limit. Just a month ago, when the SNB introduced negative rates, the bank indicated the cap was here to stay.

The move sent the franc surging to a record against the euro and rising to its highest in more than three years against the dollar. A strong franc hurts exporters and small- and mid- size companies with factories in Switzerland, where shop-floor workers earn some of the highest wages in Europe.

Holcim Ltd, the world's biggest cement maker, slid as much as 21 per cent, leading a decline in exporters. Watchmakers Cie Financiere Richemont SA and Swatch Group AG tumbled more than 16 per cent. Roche Holding AG retreated 9.1 per cent.

For owners of Swiss stocks invested in dollars or euros, the rally in the franc made up for some losses in local currency. Nestle SA's 8.3 per cent drop in francs turned into a gain of 6.4 per cent in dollars.

"No one in Switzerland has hedged their forex exposure," Ralf Zimmermann, an equity strategist at Bankhaus Lampe KG in Dusseldorf, Germany, said by phone. "All companies trusted the SNB to keep its peg against the euro. Now the rally in the Swiss franc against the euro will lead to a hit in the P&L of Swiss companies."

Economists predict that the European Central Bank is likely to announce fresh stimulus including the purchase of government bonds at its Jan. 22 meeting. ECB President Mario Draghi's policies have dragged the euro lower - a boon to exporters. Thursday's SNB decision to drop the currency peg may have been an attempt to preempt increased stimulus from the ECB, said Reyl & Cie's Savary.

"They clearly expect the ECB to do something next week, and the SNB probably thought that the cost of defending the parity after that would be too huge," Savary said.

BLOOMBERG