Just one day after an European court declared Outright Monetary Transactions OMT (aka QE, aka Money Printing) legal, the Swiss National Bank followed up with a shocking move… They removed the Swiss Franc’s peg to the Euro. This incredibly bold move has reeked havoc on the financial markets as the Swiss Franc soared, the Swiss stock market crashed, and commodities bounced higher with oil reaching +5% on the day at one point. To try and counter the new found strength in the currency, the SNB decided to out do Japan and lower short term rates to -.75%. As I write this article Swiss bonds out to 9 years offer negative interest rates!
But why now? It’s been three years since the Swiss pegged their currency to the Euro so why now? The obvious answer is that the Swiss fear what the peg would do to their economy after the ECB launches a new QE program. Just two days ago, a European court declared that Outright Monetary Transactions (aka QE) by the ECB are legal. So Draghi has all the authority he needs to go into the meeting next week on January 22nd and start the new QE program.
I of course remain skeptical that printing money will have any long term positive affects on the Eurozone economies. Short term I expect a bounce in equities but as for European bond yields, I’m not sure. There could actually be a temporary upward bounce in yields like we saw in the US when the first QE programs were launched due to fears of inflation. Those fears seem to still hold water today as we saw commodities rally hard with gold up over 2% on the day. It appears the market too believes that European QE is all but certain.
Of course there is always the contrarian position that Draghi has been blowing smoke this whole time and if he could have or wanted to do QE he would have done it by now. However, if the January 22nd meeting does pass without the start of the QE program we could see a massive drop in commodities and European equities. Is he really going to risk that? At this point I think not but we’ll see. Of course this is the central problem with central planned economies. A group of unelected people deciding where the entire world should put their money on a daily basis is absurd beyond any measure of logic. This will end so badly it’s almost comical.
Good luck to all the investors out there. May you correctly guess which way the wind is blowing!