Fallout from Swiss removing Euro peg

January 16, 2015 10:13 AM

U.S. stocks fluctuated after five days of losses and sovereign bonds rose across Europe as the effects from Switzerland abandoning the franc’s cap extended into a second day. Crude oil advanced with the dollar.

The Standard & Poor’s 500 Index rose 0.2% at 9:34 a.m. in New York. Energy shares climbed as oil gained 2%. Goldman Sachs Group Inc. fell after reporting the lowest annual trading revenue since 2005. FXCM Inc. plunged 86% after the largest U.S. retail foreign-exchange brokerage said it may have breached some capital requirements. The franc weakened 3.4% to 1.0088 per euro after soaring 23% yesterday. The Swiss Market Index retreated 4.3%, following yesterday’s biggest decline since 1989. Yields on 10-year German notes dropped two basis points to 0.45%.

The Swiss National Bank’s move sparked mayhem on trading floors and increased speculation that the European Central Bank will unveil a broader stimulus when it meets next week. The cost of living in the U.S. declined in December by the most in six years, reflecting a plunge in energy costs. Factory production cooled last month as capital spending and vehicle assemblies slowed. Goldman Sachs lost 1.4% as U.S. bank shares slumped amid earnings. Intel Corp. was little changed after projecting sales that may fall short of analysts’ estimates.

“The overriding theme of the day is a continuation of deleveraging from market speculators after the massive shot to the solar plexus the Swiss franc move gave everyone,” Chad Morganlander, a money manager at St. Louis-based Stifel, Nicolaus & Co., which oversees about $160 billion, said in a phone interview. “When you have these tremendous moves within the currency and commodity markets, the financial system tends to show its fragility.”

Inflation Outlook

Equity futures pared losses as a drop in the cost of living fueled speculation the Federal Reserve will remain patient in its plans to raise interest rates. The biggest drop in clothing costs since 1998 combined with falling air fares and cheaper new and used cars signal the deceleration in inflation is spreading beyond energy as Japan and Europe are in or near a recession and some emerging markets cool.

Sustained broad-based price declines test Fed Chair Janet Yellen’s view that the drop in fuel won’t reverberate through the economy.

A separate report showed factory production cooled as capital spending and vehicle assemblies slowed, indicating U.S. manufacturers were adjusting to weaker overseas markets.

Goldman Sachs fell after reporting a 7.1% drop in profit as revenue from fixed-income trading declined for the fifth time in six quarters. Foreign-currency brokerages Gain Capital Holdings Inc. and Interactive Brokers Group Inc. sank.

Europe Bonds

Italy’s 10-year yield reached a record-low 1.671%. Switzerland’s 10-year yield turned negative for the first time, reaching minus 0.031%. A negative yield means investors buying the securities would receive less back than they paid if they held them to maturity.

Greece’s three-year note yield jumped 150 basis points to 11.69%. Alpha Bank AE submitted a request to the Bank of Greece for cash from the Emergency Liquidity Assistance system.

“The SNB caught almost everyone by surprise and it’s creating unease and anxiety in markets,” Nader Naeimi, who helps manage about $125 billion as Sydney-based head of dynamic asset allocation at AMP Capital Investors, said by phone. “The strategy is capital preservation for now.”

ECB Executive Board member Benoit Coeure said in interview with the Irish Times that there is no decision on quantitative easing yet though “the only thing I can say is that, for it to be efficient, it would have to be big.”

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