The Swiss National Bank Quarterly Earnings reported a first-quarter loss of 6.8 billion Swiss francs on Thursday, highlighting the volatility its massive balance sheet created for the central bank’s earnings. What contributed to the substantial loss?
26 April, Swissquote – It’s universally expected the ECB will make no change in policy or communication today. The weaker incoming data has provided plenty of covers for ECB member to talk down “normalization” even introduce speculation that an increase to the current €30billion asset purchase program is actually on the table.
Let the ECB balancing act begin
The subdued inflation trajectory is unlikely to improve by June due to stronger Euro and slower growth momentum. However, real consideration of another QE extension we suspect is a smoke screen. First of all the current slowdown is global and generally considered transitory in nature. French and German flash PMI has already indicated a pick-up. Second is the fact the overall conditions in Europe have broadly improved.
The transition from economic recovery to expansion continue with GDP growth expected estimated around 2.2% for the Euro area. Hard data that requires extremely policy action which include negative interest rate and extended asset purchases. As with the Fed in 2014 a significant factor tightening was the desire to get policy off the bottom just in case an economic situation demanded real action.
ECB Forecast Expectations
Central banks need policy tool free and available and right now, the ECB is completely tied up. There was also fear that the Fed was not actually generating inflation, and driving the real economy but merely encouraging risk-taking. As of these discussions are being had inside the ECB. In addition Riksbank decisions to keep policy unchanged and keep dovish bias given the broader macro backdrop serves to only highlight the disconnect between action and results.
Despite the ECB effort to create the appearance of two-way action, there is only one way the policy can go. Draghi will clearly dance at today Press conference to keep the market guessing and not providing a bullish signal for EUR buyers. Draghi will be less dovish then March 8th but downplay market expectations for inevitable policy tightening.
We anticipate that July will bring details for deceleration of asset pushed form €30bn to €15 in October and zero by years end. Given out base scenarios, especial given our view that US 10 years have topped at 3.01%, we are positioning yourself for a EURUSD rally.
Swiss National Bank Quarterly Earnings
The Swiss National Bank reported a substantial loss for the first quarter 2018 as capital markets experienced a stormy environment, while the Swiss franc started the year off the wheel. Despite pocketing CHF 3 billion in dividend and interest payments, the central bank took valuation losses of CHF 3.9 billion on its bond positions, CHF 3.3 billion on its equity portfolio and CHF 0.2 billion on its gold holdings.
Finally, the appreciation of the Swiss franc produced a foreign exchange loss of CHF 2.8 billion, while the revenue from Swiss franc positions reached CHF 0.5 billion.
The surge in interest rates in the eurozone and in the US, together with turbulence in equity markets, have significantly hurt the SNB’s portfolio during the first quarter. However, the second quarter will most likely be more favourable as the Swiss franc extended losses against all its G10 peers, falling 2.9% against the greenback, 2.15% against the pound and 1.8% against the single currency.
The situation on the equity market is more balanced as European markets have recorded solid performance in April, while US ones have not moved much. Unfortunately, the bond prices are set to experience further downside as interest rates are rising on both sides of the Atlantic.
This article Swiss National Bank Quarterly Earnings was written by Peter Rosenstreich & Arnaud Masset, analysts at Swissquote. While every effort has been made to ensure that the data quoted and used for the research behind this document is reliable, there is no guarantee that it is correct, and Swissquote Bank and its subsidiaries can accept no liability whatsoever in respect of any errors or omissions, or regarding the accuracy, completeness or reliability of the information contained herein.
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