Another quiet day in the office? not exactly

Taking things for granted can be terribly dangerous investment strategy, particularly in current times. Few, if any, contemplated the rapid fall in the oil price, as analysts believed greater forces (OPEC) would effectively provide a backstop.

On Thursday we had another so-called black swan event, the Swiss central bank removed its cap of 1.2 Swiss franks against the euro, put in place 3 years ago to reduce the effects of the relentless rise in the currency (for its safe haven values) on the Swiss economy. The announcement saw the Swiss frank rise sharply against other major currencies, at one point gaining nearly 30% against the euro, the Swiss stock market closed down nearly 9%.

With investor sentiment already fragile, to say the least, and increased volatility lowering risk manager’s tolerance, todays move will not have helped improve the mood. Black swan events are considered as being unforeseeable occurrences, in reality they are not unforeseen, but contemplated and dismissed as too implausible to happen.

Today’s move by the Swiss central bank, contra to their recent public position, seems to be an indication that they now believe that QE in Europe is now a more probable than possible. Artificially keeping the Swiss franc down against a continually depreciating euro was becoming too difficult and the introduction of QE by the ECB would make it harder.

History tells us many things, bucking the markets is never a long-term strategy, as eventually asset prices will need to find their correct level. When that point is reached the correction is so painfully fast leaving no time to react. With hindsight it was obvious that ultimately the Swiss would be forced to make this move to prevent having to throw even more billions of Swiss francs at defending the currency position, ultimately the pain threshold was met. The Swiss central bank did try and counter act this announcement by lowering deposit rates to negative 0.75%. This had little impact, as those seeking a safe haven are happy to pay 75bp for the privilege it would appear.

Despite the continuing fall in the crude oil price and ever gathering fears of deflation another safe haven continued to attract capital as gold hit a four-month high of $1264. 

Posted on January 16, 2015 .