Takeaway: Central banks take centre stage as the spotlight moves back to the Euro – via the Swiss Franc
It was almost inevitable that the upbeat tone driving capital markets activity in the first two weeks of the year would be broken, but the nature in which it was broken was anything but expected. In a week dominated by macro-economic and central bank news flow, markets are now picking through the details – and potential ramifications – of the ECB’s Quantitative Easing (QE) plans announced yesterday.
Not everything Swiss runs like clockwork
European markets were left reeling last week as the Swiss National Bank dramatically pulled the rug out from under currency investors, announcing its abandonment of a long-standing informal peg between the Swiss Franc and the Euro. In a move that came only days after central bank officials appeared to dismiss suggestions of the currency peg being removed, the immediate aftermath saw chaotic trading across markets with significant losses reported across hedge funds and brokerage houses with a handful of firms closing their doors for good before the dust had even started to settle.
In one of the most damaging currency swings in modern history, with the Franc appreciating over 20% in a matter of hours, shares in major Swiss corporate and banking firms saw rapid selling in a manner that harked back to the height of the global financial crisis. In the aftermath, criticism of the central bank’s handling of the decision has been swift to pile up at its door, and has left a significant dent in investor confidence that will likely take a long time to remedy.
ECB announces €60bn per month of “Expanded Asset Purchases” to the end of 2016, albeit with some concessions
Conspiracy theorists were quick to point out the traditionally strong links that exists between the SNB and Bundesbank, with suggestions that the SNB’s actions in abandoning its currency peg was somehow orchestrated to reinforce German opposition to Eurozone QE plans. In all eventuality, market consensus appeared to settle on the simple conclusion that the SNB couldn’t tolerate remaining attached to the hip of European monetary policy. Confirmation of full-blown Eurozone QE plans announced by Mario Draghi earlier would appear to ratify statements made by the SNB.
Following ratification by EU lawyers for “full” Quantitative Easing by the ECB, negotiations with German political leaders have proved difficult given a sharp increase in negative sentiment in the Eurozone’s anchor economy. In order to get a plan agreed, concessions were inevitable, much to the frustration of southern European member states, including partial risk sharing of any losses from the €1.3trn QE programme (should they arise) across Eurozone central banks. Regardless of the final outcome, it is certain that a bitter taste has been left in many member states’ mouths, which in turn may give rise for some to question the validity of the recent rally in peripheral Eurozone bond yields. That the ECB’s bank lending survey, released on Tuesday, showed a strong increase in demand for corporate borrowing for fixed investments – leading some commentators to question if QE was even needed at all – was probably just a case of very unfortunate timing. If one thing is certain, this game of political cat and mouse still has a long way to run.
Davos – Not for Draghi
One notable absentee from proceedings in Davos this week was Mario Draghi, though given the magnitude of announcements made by the ECB, one can hardly act surprised. The annual winter gathering for business and political leaders has provoked the usual mix of debate on present-day economic problems (Eurozone deflation being front and centre) and longer-term global “themes” including tackling poverty, global epidemics (in light of the Ebola crisis) and stimulating cross-border trade.
Amidst heated debate as to the likely benefit, or otherwise, of additional ECB stimulus in the shape of QE, senior banking executives were rounding on longer term concerns as to potential market volatility once the US Federal Reserve starts to increase its interest rates. In particular, concerns have been levelled at the impact of new regulations, such as the Volcker rule, that have resulted in a sharp fall in the amount of corporate bonds held by banks – the traditional providers of liquidity in secondary trading. Such a reduction in liquidity was seen as a pivotal factor in October’s “flash crash” in US Treasury yields and, such is the potential concern of a repeat performance, US and UK regulators were said to be in “constructive” talks with the major banks to assess what allowances on trading inventories could be accommodated, without having to re-write the rule book. One to watch.
Big Data – fad or fact?
Big data analytics has become one of the buzz words of the modern corporate environment. It’s regularly used as a potential panacea for all potential problems a company may face. However it is real and it is here now. It is the combination of advances in computing and communications that has enabled us finally to be able to collect, collate and analyse the data that underpins many businesses operations and strategies in a more efficient and effective way – but that ability will now impact greatly on the way businesses run their operations and set and monitor their strategy.
New research from EY and Nimbus Ninety, looks at how companies are currently using big data analytics to find, measure, create and protect value across functional areas. Strikingly, the research shows that while 81% of organisations think data should be at the heart of every business decision, most are still using analytics in an isolated way to address specific business issues, limiting the potential value to increase performance and efficiency. It really does feel like the start of something new and exciting and those companies that do take full advantage of big data analytics to improve operational efficiencies and identify opportunities to grow will enhance value creation.