David R. Kotok
January 15, 2015
Switzerland’s abrupt removal of the cap on the Swiss franc’s value against the euro does nothing to alter our outlook for both US interest rates and US stock markets. Subsequent commentaries will discuss the international aspects and those portfolios. Emails this morning from clients and consultants have been focused on the US market.
Simply put, the interest rates on Swiss riskless government debt are now near zero, whether it is a one-day or ten-year instrument. Until the policy change, Switzerland was pegging the franc at 1.2 to the euro. Now it is at parity. Overnight the Swiss currency gained approximately 17% against the euro.
If you are going to Switzerland for the Davos meeting, everything will cost you more. If you are Swiss and leaving Switzerland to avoid the Davos meeting, everything will cost you less.
There is not a lot of trade impact on the US from the Swiss policy change. Swiss watches will be more expensive. Some very specialized medical devices will, too.
But Switzerland immediate neighbors are countries in the Eurozone. The franc’s contiguous boundaries are with the euro. Switzerland’s central bank worried about inflows of hot money from Russia, either directly or via the euro. Think of it this way: yesterday a Moscow-based oligarch could move money from ruble to euro. Then he could move it from euro to Swiss franc, and the Swiss government and Swiss National Bank would maintain a 1.2 currency peg.
That is now over. The game has changed.
For the US to have another major, reliable, sovereign nation trading near zero on its 10-year government bond only puts more downward pressure on global interest rates. Switzerland joins the ranks of Japan, Germany, and others where a riskless 10-year bond is below 1% and close to zero.
Translate all of that into the valuation of financial assets, particularly those in the US, and there is only one outcome. The general trend remains toward higher asset prices while US interest rates remain very low.
David R. Kotok, Chairman and Chief Investment Officer