- Canada Core CPI increased to 2.0% in June vs 2.3% exp and 1.8% prev. Headline inflation increased to 1.5% vs 1.7% exp and 1.2% prev
- Spanish Region of Valencia asked for support
- ECB said that Greek bonds are not longer eligible collateral, pending the next troika mission
- Mon: EU Consumer Confidence, US Crop conditions
- Tues: EU PMI, US Markit PMI, RichmondFed, Japan Trade Balance, Australia CPI
- Wed: German IFO, UK GDP,
- Thurs: US DGO, Jobless Claims, Pending Home Sales, Japan CPI
- Fri: German CPI, US DGP, UMichigan Confidence
Commentary & Links:
A friend, Ani, pointed out that central banks have been buying equities. In particular, the SNB has 10% of its portfolio in buying equities.
Let’s do the math. The SNB is getting 50-60bn EUR of inflows monthly. If the keep asset allocations constant, that means the inflow into equities is:
5.5bn * 12 months = 66bn per year.
In contrast, the Bloomberg Europe 500 index has a market cap of 5trn and a PE of 14.9, implying earnings over the past year of 336bn. So if the SNB put all its new equity allocation into large cap EU stocks, it would be equivalent to 20% of index earnings, and 1.3% of market cap.
Now, admittedly, the SNB diversifies equity holdings across countries. But the broader picture is not very different, since (at least as of 2010) the SNB has put the vast majority of its equity allocation into European stocks.
As of 2010, they held 414bn CHF in equities. Since then, the SNB balance sheet has increased 50%. So if they kept asset allocations constant, they now hold 600bn+ in equities. That’s 100%+ of Swiss GDP.
This raises some interesting questions. Presumably, inflows into CHF and EU stock performance are strongly negatively correlated. As EU market cap falls and inflows surge, SNB buying could pick up, but given that the market cap is falling then, the SNB’s buying effect would be larger. Also, what happens if the SNB breaks the peg? Will EU stocks tank? Also, what if the ECB cuts deposit and current account rates to negative? Would the SNB buy MORE stocks?