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Analysis: Swiss policy pivot signals exit for big stock and bond investor

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3/3

© Reuters. FILE PHOTO: A projection shows a 100 franc banknote in a window in Zurich, Switzerland December 16, 2021. REUTERS/Arnd Wiegmann/File Photo

2/3

By Yoruk Bahceli, Saikat Chatterjee and Tommy Wilkes

LONDON (Reuters) – From Silicon Valley shares to U.S. and European government bonds, securities that are already under heavy pressure stand to lose a major buyer as Switzerland ends its long-standing policy of recycling euros and dollars into foreign markets.

The Swiss National Bank recently delivered a surprise half-point interest rate hike and for the first time in years omitted references in its statement to the franc being highly valued.

The shift is a momentous one, suggesting the SNB will no longer prioritise weakening the currency by purchasing foreign exchange – a policy that enabled it to build a reserve pile of nearly $1 trillion.

Unlike most central banks, it recycled these proceeds of intervention into world markets rather than holding them at home, making it a huge stock and bond investor. In recent years it ranked among the top shareholders in the likes of Apple, Amazon (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT).

Any reduction in its purchases, or an eventual move towards selling – a possibility after the bank said it is also ready to check a weakening of the franc – risks heightening volatility on already shaky markets.

“The SNB’s departure from its previous approach to keep the franc weak means they will unwind their large U.S. stock holdings, particularly in FAANGS, which should increase selling pressure on these mega-cap names,” said Kaspar Hense, senior portfolio manager at Bluebay Asset Management, referring to the tech quintet of Facebook (NASDAQ:META) (Meta), Apple, Amazon, Netflix (NASDAQ:NFLX) and Google (NASDAQ:GOOGL).

The SNB had already cut back forex buying in recent weeks, as evidenced by a drop in “total sight deposits” at Swiss banks that are seen as a proxy for intervention. These deposits declined by 1.3 billion Swiss francs in the week ending June 17, versus a rise of 756 million francs a month earlier and an increase of nearly 6 billion francs in early April.

The SNB said it would seek to minimise the market impact whether it were to let existing bonds expire or actively sell assets, with the focus remaining on the overall liquidity of the portfolio.

With inflation above the SNB’s target, the franc has been allowed to rise to seven-year highs against the euro, briefly pushing beyond one franc per euro in March. It has performed less well against the dollar, which has soared on expectations of aggressive policy tightening by the U.S. Federal Reserve.

FAANGs

The SNB’s recent policy shift is not quite on a par with its shock decision in 2015 to ditch the franc’s euro exchange rate peg. But tighter policy and its potential step back from markets coincides with a deepening market selloff that has sent global stocks to a 21% loss this year.

Bond yields have also surged as inflation hits multi-decade highs, prompting steep rate hikes.

“In isolation, the impact (of potential asset sales) would have been limited but it comes in the middle of a sharp re-pricing and lower market liquidity so the effect will likely be magnified,” said ING senior rates strategist Antoine Bouvet.

It is difficult to gauge accurately the impact of any investment pullback, as the SNB does not provide a breakdown of exactly which assets it holds in each currency.

SNB data does show that a quarter of its FX reserves were in equities as of end-March.

At that time, U.S. regulatory filings show the SNB’s U.S. equity portfolio was worth $177 billion, including $12.4 billion in Apple shares (NASDAQ:AAPL), $9.5 billion in Microsoft and $6.4 billion in Amazon. Other holdings included $1.5 billion in Exxon Mobil (NYSE:XOM) and $1.1 billion in Coca Cola.

The SNB also holds 600 billion francs in foreign government bonds, making up 64% of FX reserves, according to Reuters calculations from SNB data.

Assuming bonds make up the same share of holdings in each currency as they do across its entire FX portfolio, Reuters calculations show that might include some $248 billion of U.S. Treasuries and 221 billion euros of euro zone government debt – most of it likely to be in top-rated bonds like Germany’s.

“Their activities have been quite large over the last few years, and we did see in general increased euro holdings by central banks, and the SNB is one of them,” BofA strategist Sphia Salim said. She predicted pressure on short-dated German bonds.

Unsurprisingly, last week’s policy pivot sent euro zone and U.S. bond yields surging.

If the SNB were to wind down bond holdings, it would first stop reinvesting the proceeds of maturing bonds, Lyn Graham-Taylor, senior rates strategist at Rabobank said. That could see the SNB drop nearly 5 billion euros of German government debt by year-end, he estimates.

In 2023, “you’ll get those concerns around the SNB potentially selling bonds, merged with higher issuance next year and the potential for ECB QT,” BofA’s Salim said – a reference to expectations the European Central Bank may eventually start reducing its own balance sheet, a process known as Quantitative Tightening.

Economy

Asia stocks edge down after Wall Street falls; oil rises

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© Reuters. FILE PHOTO: A man wearing a protective mask, amid the coronavirus disease (COVID-19) outbreak, walks past an electronic board displaying graphs (top) of Nikkei index outside a brokerage in Tokyo, Japan, March 10, 2022. REUTERS/Kim Kyung-Hoon

By Julie Zhu

HONG KONG (Reuters) – Asian shares edge down in early trade on Tuesday with investors taking their cue from a volatile Wall Street session overnight, while oil prices climbed following last week’s rout.

Oil continued to rise with investors still weighing worries over an economic slowdown against concern over lost Russian supply amid sanctions related to the conflict in Ukraine.

“A seam of tight supply news bolstered the (oil) market,” analysts at Commonwealth Bank of Australia (OTC:CMWAY) said in a research note. “Political unrest might curtail supply from a couple of second-tier producers, Ecuador and Libya. And then there’s the G7’s proposed price cap on Russian oil.”

Early in the Asian trading day, MSCI’s broadest index of Asia-Pacific shares outside Japan was down 0.7%. The index is down 3.8% so far this month. U.S. stock futures, the S&P 500 e-minis, were up 0.27%.

Australian shares were up 0.25%, while Japan’s Nikkei stock index rose 0.5%.

China’s blue-chip CSI300 index was 0.4% lower in early trade. Hong Kong’s Hang Seng index opened down 0.36%.

On Monday, U.S. stocks ended a volatile trading session slightly lower with few catalysts to sway investor sentiment as they approach the half-way point of a year in which the equity markets have been slammed by heightened inflation worries and tightening Fed policy.

The major U.S. stock indexes lost ground after oscillating earlier in the session, with weakness in interest rate sensitive megacaps such as Amazon.com Inc (NASDAQ:AMZN), Microsoft Corp (NASDAQ:MSFT) and Alphabet (NASDAQ:GOOGL) Inc providing the heaviest drag.

The Dow Jones Industrial Average fell 0.2%, the S&P 500 lost 0.30% and the Nasdaq Composite dropped 0.72%.

Oil prices rose as the Group of Seven nations promised to tighten the squeeze on Russia’s finances with new sanctions that include a plan to cap the price of Russian oil.

U.S. crude ticked up 0.99% to $110.65 a barrel. Brent crude rose to $116.22 per barrel.

Treasury yields climbed on Monday following capital and durable goods orders data and as pending home sales surprised to the upside from the previous month.

The yield on benchmark 10-year Treasury notes last reached 3.1847% on Tuesday, compared with its U.S. close of 3.194% on Monday. The two-year yield, which rises with traders’ expectations of higher Fed fund rates, touched 3.0974% compared with a U.S. close of 3.123%.

Also, the U.S. dollar edged lower versus major rivals as investors weighed expectations on inflation and interest rate hikes. The dollar index, which tracks the greenback against a basket of currencies of other major trading partners, was down at 103.91.

Gold was slightly higher. Spot gold was traded at $1,824.28 per ounce. [GOL/]

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Japan says hard to confirm impact from Russia’s debt default

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© Reuters. FILE PHOTO: Japan’s new Finance Minister Shunichi Suzuki wearing a protective mask, amid the coronavirus disease (COVID-19) outbreak, speaks at a news conference in Tokyo, Japan, October 5, 2021. REUTERS/Kim Kyung-Hoon

TOKYO (Reuters) -Japanese Finance Minister Shunichi Suzuki said on Tuesday that it was “a little difficult” at present to confirm the definite impact on Japan from Russia’s debt default.

Suzuki, who commented on the issue after being asked about it by reporters at a news conference following a regular cabinet meeting, added that any moves in Russian government bonds were likely to have a limited impact on Japanese investors.

“The ratio of investments in Russia as part of Japan’s overall foreign bond investments is limited,” Suzuki said.

“Moves in Russian government bonds are likely to result in limited direct losses for Japanese investors, including financial institutions,” he said.

The White House and Moody’s (NYSE:MCO) credit agency on Monday said Russia had defaulted on its international bonds for the first time in more than a century.

The Kremlin, which has the money to make payments thanks to oil and gas revenues, has rejected the claims that it has defaulted on its external debt.

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Economy

Euro gains traction ahead of inflation data, dollar steadies

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© Reuters. A shopper pays with a ten Euro bank note at a local market in Nice, France, June 7, 2022. REUTERS/Eric Gaillard

By Tom Westbrook

SINGAPORE (Reuters) – The euro won support on Tuesday as traders braced for European inflation figures to run hot this week and awaited a speech from central bank chief Christine Lagarde, while worries about a recession kept the U.S. dollar firm.

The euro rose 0.3% overnight and at one point poked above its 50-day moving average. It last sat at $1.0578.

The dollar held modest overnight gains on other currencies and traded at 135.37 yen and $0.6936 per Australian dollar early in the Asia session.

German inflation figures are due on Wednesday, French data on Thursday and euro zone numbers on Friday. European Central Bank President Lagarde is also due to speak at the ECB forum in Sintra, Portugal, at 0800 GMT on Tuesday.

“This set of inflation data will have a significant influence on the ECB’s monetary policy forward guidance, especially on the trajectory … of its interest rate hike cycle that is expected to kick start in July,” said CMC analyst Kelvin Wong.

Hike expectations have the euro trading firmly against the yen and it last bought 143.28 yen, close to last week’s seven-year high of 144.24. It also has momentum on sterling and has gained 1.2% this month to 86.15 pence.

The weak spot is against the Swiss franc which has rocketed to test parity on the common currency following a surprise rate hike by the Swiss National Bank earlier in June.

Moves elsewhere were modest as traders try and navigate between relief that signs of weakness in recent global economic data can moderate rate hikes, and worry that it could be a harbinger of the onset of a difficult period of stagflation.

Some of the heat has come out of bets on U.S. interest rate rises, with the peak in the Federal Reserve’s benchmark funds rate now seen hovering around 3.5% next year rather than 4% or above, but the dollar has not yet fallen far from lofty peaks.

The U.S. dollar index struck a two-decade high of 105.79 this month and was last steady at 103.93.

The risk-sensitive Australian and New Zealand dollars have been left behind in last week’s stock market bounce. The kiwi was steady at $0.6306 on Tuesday.

Sterling was similarly becalmed at $1.2274.

“Stay long the dollar until some of the uncertainty has reduced,” said Societe Generale (OTC:SCGLY) strategist Kit Juckes.

“The dollar will fall likely only when the global economy is on a more sustainable growth path … markets are forward-looking, but all we can see ahead today is danger.”

========================================================

Currency bid prices at 0130 GMT

Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid

Previous Change

Session

Euro/Dollar

$1.0579 $1.0583 +0.00% -6.91% +1.0586 +1.0571

Dollar/Yen

135.3050 135.4600 -0.12% +17.63% +135.5850 +135.3000

Euro/Yen

143.15 143.35 -0.14% +9.84% +143.4500 +143.1300

Dollar/Swiss

0.9558 0.9562 -0.07% +4.75% +0.9567 +0.9555

Sterling/Dollar

1.2274 1.2265 +0.07% -9.24% +1.2283 +1.2263

Dollar/Canadian

1.2866 1.2872 -0.05% +1.76% +1.2878 +1.2858

Aussie/Dollar

0.6929 0.6925 +0.09% -4.65% +0.6938 +0.6918

NZ

Dollar/Dollar 0.6300 0.6302 -0.02% -7.96% +0.6307 +0.6293

All spots

Tokyo spots

Europe spots

Volatilities

Tokyo Forex market info from BOJ

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