It was rather quiet on the currency front, in spite of the Brexit aftermath, attempted coup in Turkey, the terror attack in Nice, and the impending banking crisis in Italy with its looming risk to infect the whole of Europe. The exchange rates of USD to the British Pound, Euro against the Swiss Franc or to US Dollar remained fairly stable. The greatest danger lurks surely in the British Pound and the Euro. Since pronounced correction of the Pound sterling has already taken place (the Pound corrected against the Swiss Franc by 12% since the year’s beginning), one should pay attention to the risks in the Euro. Exchange rates of about 1.09 to the Swiss Franc are a straight invitation to swap Euros into Francs. Both, the withdrawal of the second largest economy (UK) from the European Union as well as the Italian banking crisis, do not exactly foster trust in the single currency.
In the interest rates domain and in the bond markets we are confronted with absurdities. At the same time that the EU Commission opens proceedings against Spain and Portugal for their non-compliance with the deficit targets, the European Central Bank (ECB) buys sovereign debt – deficits’ obvious consequence. With one hand – the line of action is condemned and sanctions imposed, with the other – the same action is being financially supported. Perhaps the European Union should simply admit, that the once agreed upon Maastricht criteria, were long ago relegated to the shelf. That such an admission should lead to weakening of the euro, is predictable. We, therefore, recommend selling the Euro against the Swiss Franc.
The sell-off of the non-investment grade bonds following the surprising YES to Brexit has reversed. High-yield bonds have picked up again on the recovery path, set at the beginning of the year, and have already offset the short-term losses. Some individual bonds managed, in the course of this year, to appreciate between 20 percent (Petrobras) and 35 percent (ArcelorMittal). These examples show that panic is a bad counsellor – those who remained patient, cool-headed, and have not sold, did not come to harm.
Sovereign debt issuing activities of the Swiss Confederation and those of the Federal Republic of Germany are indeed to be compared with an abstract art. Why should an artist toil for weeks on a masterpiece, if a simple, red painted canvas brings already 1 million? Or why, for that matter, should there be a 10-year government bond paying any interest, when the buyers are willing to pay interest for holding such a bond? The World up-side-down! But then, as is well known, markets are always right!
– Written by Ralph Weidenmann
Last but not least:
“In the business world, the rear-view mirror is always clearer than the windshield.”
Warren Buffett
Your Wealth at a Glance.