The Swiss franc has caught some air after years of being pegged to the Euro currency and a bastion of stability. As the Swiss currency was dragged lower by the plunging Euro to multi-year lows this month, the Swiss
central bank stopped defending the Euro/Swiss link and allowed its currency to rise from a 4 and a half year low to a 3 and a half year high in the SAME day! Billions of hedges were swamped and managers went bankrupt on the surprise announcement. Tourists and investors may rethink their plans as the Swiss detach themselves from the Eurozone ahead of this weeks anticipated Euro devaluation and monetary stimulus announcement. Concerns of the 1990’s Asian contagion currency crisis may arise from this blindside blow to Global financial coordination.
The Swiss stock market fell 14% in just 2 days! That would be the equivalent of our DJIA (Dow) losing 2,500 points. The US stock market has never had a single day or 2 day decline such as this and only once on Black Monday October 10th 1987 did the Dow fall more in percentage terms. This was a big move that hurts the Swiss and the trust of many investment banks that relied upon its stability.
One more look at the Swiss reveals that while Exec Spec did not expect such a sharp move, our work had been signaling a Bullish upswing in the Swiss franc vs the Dollar and Euro. Prices often bottom when the commitment of traders bank positions become this positive. As we can see the past couple of weeks have implied that investors should be buying the Swiss relative to other currencies.
While not as Bullish yet, the Yen is also supportive like the Swiss adding to the US Dollar pressure on the falling Euro currency as they approach their January 22nd Quantitative Easing (QE) decision. QE stimulus in Europe has encouraged the Swiss to abandon their Euro currency peg to avoid having their pristine currency dragged through the monetary manipulation mud.
There will clearly be a QE program announced on the 22nd and the global markets have mostly discounted this news by sending the Euro to 11+ year lows!!! Should the QE stimulus be less aggressive than the markets anticipate then we could see a sharp Euro rally and Gold decline as markets unwind current bets awaiting more QE Bond buying programs to drive interest rates still lower. If Mario Draghi, President of the European Central Bank (ECB), has his way then QE will be unlimited and massive enough to send the Euro still lower and Gold higher. This will be a news driven week where fundamentals and technicals take a back seat.
The ECB decision could send stock markets in either direction as expectations are met or disappointed this week. On the short term stocks are quickly approaching an oversold sentiment condition enabling another rally phase. 10 day Option Put/Call ratios are edging close to levels that have marked fairly precise buy points in each of the last 5 occurrences at this 70 level. Excessive put option buying indicates too many are investing to profit from lower stock prices where Put option values rise and call option values fall as stocks fall. Contrary opinion has shown it’s best to invest in the opposite direction of such sentiment extremes. One more leg lower in stock indexes would better align with a price low and extreme pessimism.
Longer term we will remain Bullish on US stocks for perhaps several more years as we need a yield curve approaching inversion in a rising rate environment and an excess of consumer confidence, wage acceleration and breadth/momentum divergences. While Europe spent much of the past couple of years in austerity mode the Global stock market Bulls would welcome an aggressive ECB that joins the US, UK and Japan in encouraging greater risk tolerance and credit creation. Based upon history it would be unprecedented to adopt a negative outlook about the secular valuation of stocks and the economy while the world continues to battle 6+ years of debt deflation and economic stagnation without any signs of economic euphoria. Equity portfolios remain 90% invested in stocks basis the SP 500.
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