Recap 7-20-12

Main Items:

  • 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

Overseas:

  • Spanish Region of Valencia asked for support
  • ECB said that Greek bonds are not longer eligible collateral, pending the next troika mission

Upcoming Data:

  • 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.
http://www.snb.ch/en/iabout/assets/id/assets_reserves

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?

Jeez.

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3 thoughts on “Recap 7-20-12

  1. Hi, and thx a lot for all these truly very high quality posts (rare on internet nowadays)!
    Just a quick question, as I am afraid I am missing something here. According to SNB reports (page 138 of 2011 report or 133 of 2010 report), SNB is claiming roughly CHF 21bn in Foreign Currency Equities (and roughly 50% of them are EUR denominated), for a total of CHF 260bn of Foreign Currency investments in 2011. So I can’t get where your CHF 414bn of equities holding comes from (total 2011 assets actually accounts for CHF 346bn “only”)…
    But I do agree that now regarding current situtation, people should ask the “What if” question. What if the Euro loses 30% ? What is the Eurozone breaks up ? etc… My guess is that the implications would depend on the breakdown per country of equities holding (i guess the SNB holds more German stocks than Greeks ones…), but we don’t have that level of details yet !
    Enjoy your holidays btw !!

    SNB Sources :
    http://www.snb.ch/en/mmr/reference/annrep_2010_komplett/source
    http://www.snb.ch/en/mmr/reference/annrep_2011_komplett/source

    1. Hi Phil –

      Thanks for posting! I thought I saw the 414 figure on one of their reports, but I’m having trouble finding it. Seems like you’re right in that the figure I cited is too high, and thereby the effect is lower than I thought. Thanks for checking the figures.

      Indeed, there are a lot of what if questions still…

  2. And what if current Switzerland CPI at – 1,10 start running the other way ? Swiss monetary basis can increase without any real danger for Swiss economy while we are in an alleged national deflation, but should inflation come back, rates would have to be adjusted one way or the other, and this will put even more pressure on the upside of CHF…

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