By Josie Cox
The Swiss franc remained pinned at sky-high levels on Monday,
hovering around one-to-one against the euro after last week's shock
decision by the Swiss National Bank to allow its currency to
climb.
By midmorning, the franc's gains against the euro were at close
to 20% since last week. After the bank's announcement last
Thursday, the euro lost about 30% in value against the franc--the
biggest single-day move in a developed market traders could
recall.
"Around parity the Swiss franc appears more overvalued versus
the euro than at any other time in the last 30 years, and the
strength of the Swiss franc is likely to put significant strain on
the Swiss economy," Beat Siegenthaler, a currency strategist at UBS
said--adding that he nonetheless assumes that the exchange rate
will "fluctuate around parity for the coming months."
Swiss equities regained some stability on Monday, with the main
Swiss SMI up 1.8% even though various banks and brokerages took
action by slashing recommendations and price targets for various
names.
Several took aim at Swatch Group Ltd, which depends heavily on
international sales and has a high cost base denominated in
francs.
Kepler Cheuvreux trimmed the name to "hold" from "buy" mirroring
a share-price target reduction by 125 francs to 450 francs from
Renaissance Capital.
"The pressure on foreign revenue and a fairly inflexible cost
base are likely to exert pressure on the operating margin,"
Renaissance analysts wrote in a note.
Swatch shares were up a little more than 3% on Monday at around
366 francs apiece, but remain more than 17% lower than where they
were before the SNB announcement.
Having last week been among the biggest losers, shares in Swiss
banks Julius Baer Gruppe AG and UBS Group AG were also among the
biggest gainers on the pan-European all-sector index on Monday, as
were shares in Zurich Insurance Group AG, Swiss Re AG, Nestlé SA
and Novartis AG.
Despite some relief, though, most are still nursing double-digit
share price losses since last week.
The head of the Swiss finance department Eveline Widmer-Schlumpf
told local press over the weekend that the country "can cope" with
the decision by the SNB to let the euro fall below its previous
limit of 1.20 francs, but many banks see it remaining dramatically
below that level for some time to come.
Credit Suisse economists updated their forecasts and said that
they--similar to UBS--now see the franc at euro parity for at least
12 months.
Sebastien Galy, a currency strategist at Société Générale said
that he expected the euro to fall as low as 0.95 francs ahead of
this week's European Central Bank meeting. The finance ministry's
hope for 1.10 francs looks "forlorn for a while", he added.
Expectations that the ECB will announce plans later this week to
aggressively ramp up its asset-purchase program continued to shape
markets beyond the Swiss franc.
Barclays economists wrote that expectations of the ECB embarking
on sovereign quantitative easing, or QE, were now so high that
"without decisive actions, the ECB risks failing on its mandate to
deliver on the inflation target and financial stability."
"Deflation and market stress, in turn, would deteriorate fiscal
dynamics in the euro area and possibly precipitate default or
breakup scenarios," they added.
Yields on sovereign bonds issued by countries including Italy,
Spain and Portugal slumped to fresh all-time lows. The euro hovered
around $1.1570, taking its losses against the dollar so far in 2015
to almost 4.5%.
"Given what we know about the impact of QE programs on
currencies it seems reasonable to suppose that the start of this
week will see the euro come under significant pressure against a
wide range of currencies, " Simon Derrick, chief market strategist
at BNY Mellon, said.
The Stoxx Europe 600 and London's FTSE 100 were broadly steady
on the day, near a seven-year high, while Germany's DAX added 0.3%
and France's CAC declined 0.2%.
In Asia, however, the Chinese stock market suffered its worst
selloff in six-years after national regulators disciplined three
major brokers for violating rules on margin lending, that helped
fuel China's historic stock-market rally with shares up 53% last
year.
Brent crude slumped 0.9% to around $49.69 a barrel while gold
edged 0.1% lower to $1,275.70 a troy ounce.
Write to Josie Cox at josie.cox@wsj.com
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