SNB back in the green

After reporting a loss of CHF 14.9 billion for the year 2018, the Swiss National Bank comes back in the green for the first quarter of 2019 as it reports a profit of CHF 30.7 billion. This is no surprise as it has been an excellent quarter for equity investors, while in the FX market the Swiss franc lost ground against most of its peers. The profit on foreign currency positions reached CHF 29.3bn, thanks to favourable stock market conditions, which generated a profit of CHF 17.1bn, and a gain of CHF 6.9bn on interest-baring papers. The Swiss franc’s slight devaluation helped to generate a gain of CHF 1.9bn.

The recovery in capital markets that started immediately after last December sell-off was a breath of fresh air for Thomas Jordan and his team. With the equity market almost back to their pre-sell-off levels and global treasury rates having already retraced gains, the outlook is gloomier. However, many central banks are leaning towards further monetary easing measures, which could translate into a stronger equity market. As long as investors believe that central banks have the situation under control, we believe that equities could climb higher. Nevertheless, we noticed that more and more investors are concerned by the dependency of investment assets on central banks’ liquidity. For example, the BoJ owns more than $250bn worth of Japanese equities, which corresponds to more than 75% of Japan’s ETF market and around 5% of the total equity market. The ECB recently opened the door for similar measures; there is therefore a chance that the ECB walks in the BoJ’s footsteps. If investors are confident this is the right move, there are fine days ahead for European equities. In Switzerland, the SNB is not ready to walk down that road. The Swiss central bank would be more keen to rates further into negative territory.

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Mixed JPY as BoJ statement overlooked

Recent monetary policy meeting statement made by the Bank of Japan (BoJ) had a muted reaction on the marketplace. The yen is in positive territory as traders are cutting their positions ahead of Japanese Golden Week in anticipation of any potential flash crash risk while the stock index Nikkei 225 closed the day up 0.48%. Without much surprise, the central bank kept its policy rate unchanged, expressing concerns regarding economic and prices outlook amid current global economic developments. However, the BoJ provides more details on the period during which ultra-loose monetary policy should remain, stating a minimum one-year time period after continuously asserting “for the intermeeting period” in prior declarations.

Yet despite the fact that the central bank is expected to maintain the pace of current JGB purchases at JPY 80 trillion ($715 billion), leave 10-year JGB yield flexible along 0% and implement further mechanisms including a lending exchange-traded funds of JPY 6 trillion ($53.65 billion) or an easing of collateral lending conditions, it becomes clear that the BoJ is coming to the end of its sleight of hand after all. The publication of the BoJ quarterly outlook report also confirms that the 2% inflation target won’t be reachable before 3 years and that inflation should reach 1.10% this year. There is therefore little upside potential for the JPY to expect, except in a broader risk-off event.

Currently trading at 111.86, USD/JPY is expected to rebound, heading along 112 short-term.

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