Event Driven Weekend

This weekend will be dominated by EU policy makers meeting in Brussels and representative of the G20 countries in Osaka. From a market standpoint, we are not widely interested in the into EU summit which will focus on complexity of personnel issues. Yet the potential successor of ECB president Draghi will have our attention. The probability of a Weidmann ECB presidency has increased significantly. The legacy of Mario Draghi will likely the total domination of the Governing Council. This control was encapsulated by the “Whatever it takes” speech and action which saved the EU monetary experiment in the summer for 2012. While Trichet had a strong hand, in most investors mind, Draghi is the ECB. It is logical to expect the factions in the Governing Council to crawl back some power as Draghi departs. Draghi’s ECB policy skew towards benefiting indebted peripheral nations (via loose monetary policy and delayed normalization), will likely be diluted. Weidmann will need to hear minor member who are worried about the threat of an extended period of negative interest rates into banking sector, pensions and savers, will now be heard. Barring a massive deterioration in economic outlook (ECB express real concern over the decline of market-based inflation expectations) unorthodox easing will be delayed. Should Weidmann get the nod, markets will expect less bond buying, supporting European yield curves and banking stocks. Yet with many moving pieces don’t expect a sharp correction. Especially considering it only speculation how the President of the Bundesbank will act when represented 19 members’ states of the European Union.

The ECB and Fed opening the door to rate cuts have seen bond yields in European and US drop meaningfully. Gold prices, however, have been the primary beneficiary to expectations of currency debasing. That said, policy uncertainty in ECB could reverse monetary policy safe-haven trades.

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President Trump and Xi meet on Saturday on the sidelines of the G20 summit will likely have the broadest market impact. Unlike past meetings both domestic economies (prior weakness was isolated to China) have reported sharp deceleration. This rises expectations for a positive outcome (although a solid agreement is unlikely). Trump is now under significant pressure from constitutes to find a solution as negative consequences of the trade conflict mount. The US now risks structural shifts that could indeterminately damage agriculture and manufacturing sectors. Which in turn could spill over into the broader economy. The sharp downturn in consumer confidence indicates the trade war is having, at least, a psychological effect. While we don’t anticipate any breakthrough we suspect that Trump will take a moderate tone which will be risk positive Monday.

No faint hope game as EU and Switzerland turn their backs

It seems difficult to say, but it is a fact: Swiss Federal Councilor, Head of Foreign Affairs department, Ignazio Cassis, confirmed on Thursday that the EU has decided not to extend recognition of Swiss stock exchange, expiring on 30 June 2019. Yet unlike people consider, risks of a major decline in Swiss shares is rather limited. Swiss authorities “Plan B” should safeguard Swiss stock market from any abrupt decline in liquidity or downward pressure on prices. Indeed, the countermeasure implemented by Swiss authorities give EU investors the option to invest in Swiss shares directly by re-routing money flows through Swiss exchanges while a ban of Swiss registered multi-market securities in the EU is therefore implemented. EU sanctions have however no impact on multilateral trading facilities or systematic internalizer investment firms according to MiFid II.

Starting from July 2019, Swiss stock market should therefore remain safe and could even benefit from higher volumes short-term, at the benefit of Swiss brokers. However, the situation could worsen in the long-term, as the Swiss market could lose its shine due to persistent frictions with the EU, which would pose major obstacles to EU investors and asset managers in terms of investment horizon, adequacy and underlying risks. In addition, incentives to implement IPOs on the Swiss stock exchange would be reduced. The tough stance shown by the EU is therefore highly related to UK’s Brexit and the fact that it is not willing to send the wrong signal to its British counterparts. Following the headline, Swiss exchanges are facing a drop due to idiosyncratic risk, while the Swissie stays unaffected. June KOF economic barometer points to a drop of 0.2 points, pointing at 93.6 (prior: 93.8) as the goods producing sector and private consumption are declining while foreign demand shows positive signals.

EUR/CHF is trading at 1.11021 (-1.36% year-to-date), approaching 1.11150 short-term.

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