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Monday, 28 July 2014

Optimism, capitulation and the relentless rise of the franc

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There appears to have been something of a sea-change in sentiment over the past week where even the glass-half-full brigade are beginning to think about throwing in the towel.

Anthony Peters, SwissInvest Strategist

I looked this morning at how they had tried to squeeze the Dow into the close last night but how the attempt to get a more constructive close to the month failed. The Dax, on the other hand, did get squeezed with the last tick of the day taking the index from 6,241 pts to the closing price of 6,264.38 pts. In the event, both indices ended the day in the red and May will mark the first down month for the Dow since September last. Maybe one might note though that April was only up by 1.59 pts but in the broader definition that is quite enough.

Both the news on the massive outflow of Spanish deposits and the softer US releases, not least of all the Chicago PMI which reported at 52.7 as opposed to the forecast of 56.8, have taken a bit of wind out of bull’s sails.

The fundamentals will prevail and those of Switzerland just remain compelling. A quadrupling of your money over forty years even beats London property and you get to collect the interest in person and spend it on skiing holidays

Under normal circumstances, the great capitulation trade is the sign of an impending reversal but I don’t get the feeling that smart money is lining up in order to pounce on the opportunity. The fear and loathing really is becoming completely pervasive.

Perhaps one of the most telling of events was when the global head of rates sales in a large firm phoned me and asked me, on behalf of a friend of his, for my investment advice. Anyone care to talk of the blind leading the blind?

Anyhow, we spoke for a while about the prospects for the Swiss Franc which once again looks like a good bet. Swiss Q1 GDP reported yesterday at +0.7% QoQ and +2.0% YoY which blew away the forecasts of 0.0% and 0.7% respectively. All the while, the SNB is still steadfastly sticking to its 1.20/€ policy. Nevertheless, there is now talk of introducing controls on capital inflows into the country as Switzerland remains one of the world’s most favoured safe havens and the betting has to be that, sooner or later, the SNB’s vaults will be so full of euros there’s simply no space left for any more.

So, if the euro breaks up, you want to have Francs and if it doesn’t and the safe haven status wanes, the SNB takes the brakes off and it appreciates nevertheless. Let’s face it, any long term bet against the Swissy in the past forty years has been a bad one. Forty years ago today it was at US$3.84. As at this morning it’s at US$0.9733 although it did reach a low of £0.7855 last summer. Without the euro peg, it would no doubt be close to the low or even below there.

At some point, the SNB’s interventions will have to cease and unless you can see a major reversal of the economic fortunes of the eurozone, not being long Swissy is tantamount to being short. I recall the Swiss running negative interest rates in the 1970s in order to halt capital flight. However, in the long term the fundamentals will prevail and those of Switzerland just remain compelling. A quadrupling of your money over forty years even beats London property and you get to collect the interest in person and spend it on skiing holidays.

Her Majesty’s Jubilee

So, this supposedly United Kingdom is this over this four day week-end celebrating the 60th anniversary of Her Majesty’s accession to the throne – all TV channels are full of footage of her coronation which, in fact, didn’t take place until 1953 – and will do so with lots of flag waving and pageantry. No doubt the Prime Minister will show his common touch by donning a Union Jack themed shell suit and cremating some sausages on a barbecue which reeks of lighting fuel while washing them all down with a quantity of 15 pence a bottle French lager.

We’re all back on Wednesday.

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Alas, it’s that time of the week again and all that remains is for me to wish you and yours a happy and peaceful week-end. May you, if wondering why they say that 60 is the new 40 agree with me that it must be because it is the age at which you know that you have to work for another 25 years in order to be able to retire.

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