This week proved to be a historic week for the financial markets. Since 2008, nearly every nation has been trying to devalue their currency. The Swiss resisted for a time, but after repeated troubles with eurozone sovereign debt, the Swiss National Bank (SNB) feared safe haven buying of the Swiss franc would lead to an overvalued currency versus the euro. Since 2011, the Swiss franc was pegged to the euro at a rate of 1.20 francs to 1 euro.
On Thursday, the Swiss reversed course. The immediate response was a massive move of more than 30 percent in the Swiss franc versus the euro, before settling down to a gain of about 17 percent and a roughly 1 to 1 exchange rate. The large move came in part because many speculators were using the Swiss franc to fund carry trades. Since the Swiss franc has negative interest rates (the Swiss National Bank cut interest rates to negative 0.75 percent on Thursday) and it was depreciating along with the euro, many currency traders shorted the franc and used the proceeds to bet on other currencies.
Thursday’s decision by the SNB to ditch the peg caused these trades to blow up. Two currency brokers have also collapsed; one listed in the U.S. was FXCM Inc. (FXCM), which saw its shares drop 88 percent from Wednesday’s close after the firm said it can no longer meet regulatory requirements. Another firm in New Zealand said it will shut down as a result of losses on Thursday. Several other brokers are also reporting losses, including Deutsche Bank (DB), Barclays and Interactive Brokers (IBKR). These losses won’t break the firms, but it weighed on the financial sector on Friday.
The currency market wasn’t the only one to see a shock. Only one day earlier, Chinese hedge funds dumped copper at the open in China and sent that metal down nearly 20 cents a pound. It was the largest one day loss in copper since 2009, amid the financial crisis.
For all the action in the commodity and currency markets, the stock market was remarkably calm. Stocks drifted lower this week, with the S&P 500 Index down about 2.5 percent heading into Friday trading, a healthy dip for a single week, but nothing out of the ordinary. Healthcare and consumer staples are still up for the year and utilities and real estate are rallying on the back of lower interest rates. Dividend shares are outperforming. An even better sign for the market is the strength in small and mid cap stocks. The latter are leading the market right now, and until Thursday’s drop, small caps were leading large caps. This shows the underlying bullish sentiment in the market.
Earnings reports didn’t provide any help for stocks this week either. Intel (INTC) beat its earnings estimates, but then delivered weak guidance on margins. Citigroup (C), J.P. Morgan (JPM) and Bank of America (BAC) also fell following their reports.
Economic data released this week was positive, but unfortunately, it was overshadowed by other events. Retail sales in December were down, but a big chunk of the drop in sales was due to falling gasoline prices. Adjusted for the drop in prices, gasoline consumption likely increased, which means economic activity increased. It’ll take some time for that activity to show up in the data, but cheaper energy will be a positive factor for economic growth in 2015. Based on previous drops in oil prices of similar size, growth in 2015 should exceed estimates in much of the developed world.
Nevertheless, investors may need another week before they focus on long-term factors. Losses from the move in the franc will be a big story over the weekend. Next week the European Central Bank meets to decide whether it launches a quantitative easing policy, and a few days later, Greece votes. These events may create volatility in the markets over the short-term but ultimately, the positive long-term trends will guide stocks higher.