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Historic Swiss Central Bank Decision Sends Markets Reeling


Today's financial recap and tomorrow's financial outlook.

Market participants witnessed something historic today. The Swiss National Bank (SNB) shocked the market early this morning and said that it was abandoning its 1.20 peg Swiss Franc (CHF) against the Euro, and lowered its interest and deposit rates to -0.75%. SNB President Thomas Jordan said that because of a substantial increase in safe haven demand flows and divergences in international monetary policy, the central bank decided to abandon the cap, although it will continue to be active in foreign exchange markets.

The EURCHF fell about 16% in today's trading. To put things into perspective, depending upon the historical range, that is at least a 35 standard deviation event. In terms of the probability of seeing such an event, a 25 standard deviation event is likely about once every 100,000 years. What was most concerning to market participants is not that it happened, but that it has now occurred in two different currencies over the past two months. And in this instance, currency positions that were short the CHF were very widespread. The Swiss Market Index (SMI) fell 8.67% and at one point was down more than 12%, at the time its worst performance in history.

Another victim of the Swiss National Bank's move today was the EURUSD FX cross and German Bunds. The former was down 1.42% and the latter up 5bps to 0.47%. Participants believed that because the SNB holds a substantial amount of Euros, it will now be forced to sell these in addition to the Bunds. Especially because the SNB decision appeared to indicate that the ECB is likely to move forward with its expanded asset purchase program next week.

Trading was very rocky across all assets today as participants attempted to determine the fallout from the SNB's decision. S&P 500 (SPX) futures initially traded down as much as 19 points before rebounding as crude oil found its footing, which was likely due to some levered investors being forced to cover short positions due to margin calls from CHF shorts. By the opening bell, selling pressure took over again and the SPX traded down as much as 0.98% and remained near there for the rest of the session. The poor earnings news from Lennar (LEN), Citigroup (C), and Bank of America (BAC) only made matters worse.

Tomorrow's Financial Outlook

The main concern for investors tomorrow will be twofold. First, Nikkei newswire ran an article today stating that Bank of Japan officials were concerned that its bond purchase programs have been distorting the functioning of the financial system. Second, the extent of the damage from the Swiss National Bank's decision today to foreign exchange brokers and banks is unknown, and it could ripple through financial markets for weeks to come. So that fact is likely to keep participants on edge.

The major economic release tomorrow is the December consumer price index. Prices are expected to decline by 0.4% from the prior month, after a drop of 0.3% in the month prior. That should bring down the annual rate of change to 0.7% from 1.3%. Also scheduled to be reported is industrial production, capacity utilization, and the University of Michigan/Reuters consumer confidence index. Production is expected to slow by 0.1% in December after a sizable jump in November due to holiday sales.

There are no major economic release across the rest of the globe overnight. Final December consumer price readings for Germany and the Eurozone are scheduled to be released. Swiss retail sales are also on the schedule.

PNC Financial (PNC), Suntrust Bank (STI), Goldman Sachs (GS), and Comerica (CMA) are scheduled to report earnings tomorrow.

Twitter: @Minyanville

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