Market commentary: The Swiss Franc havoc and the energy saga

The last couple of trading days have been characterized by substantial volatility and higher trading volumes, fuelled by fluctuations in the oil and commodities prices and by the unprecedented domino effect initiated by the Swiss Central bank’s decision to discontinue its 3 years-long currency cap against the Euro.

Although the Swiss National Bank (SNB)’s surprise announcement, on Thursday 15th January, to discontinue its unconventional currency cap that for the past 3 years had maintained the EUR/CHF fixed at 1.20 may have helped the European markets to post 2 straight days of gains above the 1% mark, it had also caused the SMI Index to plunge and brought havoc across brokerage firms, hedge funds and currency markets.

While markets and analysts are still assessing the short to mid-term impact of the Swiss Franc sudden and erratic appreciation, from New Zealand, to London, to New York, brokerage firms and banks have witnessed mounting losses materialize while a complete liquidity froze-up prevented investors and hedge funds from closing open positions, and in so doing, limiting their downside exposure.

Throughout Friday’s session FXCM, the largest US retail FX broker announced that clients with open positions in the Swiss Franc owned the Company over $ 225 million in losses, and it was, therefore, temporary suspending operations and desperately looking for a potential investor or lender to come into the rescue by providing fresh capital in order to meet regulatory minimum capital requirements. Leucadia, parent company of investment bank Jefferies Group, answered the call and extended to FXCM a senior secured term loan worth $300 million at an initial coupon of 10%., which will allow the FX broker to continue ordinary operations.

New Zealand-based Excel Markets was less lucky and after falling short of minimum capital requirements announced it was terminating operations due to the size of client’s losses related to the sudden Swiss Franc’s appreciation.

The SMI market was another major loser of the SNB’s sudden policy change, with an economy based on exports and almost all industries exposed to a sudden FX negative charge, all major Swiss companies posted large equity value losses, erasing over CHF 100 billion in market capitalization over the last two trading sessions.

However, due to the substantial drop experienced by the whole SMI and the future FX adverse exposure mostly priced in, analysts thinks that this could be an attractive entry point into the Swiss market that historically have proved to be one of the most stable equity market across the globle.

International investors holding Swiss stocks seems, so far, to be the only potential winners because although the extend slid of equities prices, the strong appreciation of the Swiss Franc against all currencies has counter act the negative impact and has left many international investors in the green. For this investors the current environment may prove an interesting opportunity to top up on already opened positions at a substantial discount.

The US markets also performed well on Friday, posting important gains with the S&P 500 adding 1.34%, the Nasdaq adding 1.39% and the DJIA ending 1.10% higher. The rally was mainly led by the price of oil with the Brent Benchmark posting a resilient session and managing to remain above the psychological level of $50 per barrel.

The energy stocks were the major winners with sizable gains across the board. Among the most actively traded there were oil and drilling services providers Schelumberger Ltd. And Halliburton Co. which rose 6.13% and 4.82% respectively.

Halliburton Co. was also in the spot light last November after announcing an agreement to merger with competitor Baker Hughes forming the second largest operator in the industry. This M&A was seen by analysts as an important sector’s consolidation with the potential to unlock substantial cost savings and improve global reach and development ability.

Although the implementation of this merger is still undergoing and pending final approval by the regulator, the recent downside pressure experience by the entire oil related industries, it said to offer investors with a long term view a discounted entry point to what analysts believe will be a major player in a future oil and energy sector rebound.

This article was issued by Paolo Zonno Trader/Analyst at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.

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