23 October 2015 – Weekly Swiss and global market roundup.
Brought to you by Investec Switzerland.
Swiss financial market news
Global stocks rallied after “Super Mario” signaled that additional monetary stimulus is on the table if growth continues to falter.
The SMI outperformed global stocks after it received a further lift from hints that Europe will add additional stimulus to bolster its economy. The out performance of the SMI was supported by better than estimated earnings from Roche and a strong rebound in cyclical stocks such as materials and selected financials. The emerging-market slowdown is holding back global trade and a rising euro is putting further downward pressure on inflation, which dropped below zero last month. Economists are debating whether policy makers will cut rates, expand QE, do both or even more.
Global equities resumed their October rally after the European Central Bank kept interest rates unchanged and signaled that additional monetary stimulus is at the ready if growth continues to falter. The ECB is grappling with a complex scenario of mixed domestic economic signals, an uncertain global outlook, and divergent opinions on what is needed to combat feeble inflation. After the meeting in Malta, one of two each year held outside Frankfurt, Draghi and most of his colleagues said it’s too early to decide whether to expand their current bond-buying program. In the US, stocks rallied towards end of this week after a batch of better-than-estimated earnings from companies including McDonalds and eBay boosted optimism on the health of corporate America.
In Asia, a report released this week showed that China’s economy slowed less than expected in the third quarter as a resilient service sector shrugged off the stock market crash and offset continued weakness within industry. GDP expanded 6.9% year on year in the third quarter which is the slowest rate of growth since the financial crisis. While the manufacturing sector was weak, growth in services output accelerated significantly.
Draghi repeating ECB history primes euro area for fresh stimulus
If you want an idea of Mario Draghi’s plan for the euro area, revisit 2014. In May last year, as the threat of deflation stalked a euro area barely out of recession, the European Central Bank president’s comment that his Governing Council was comfortable with acting prefigured interest-rate cuts and a program of targeted long-term loans the next month. In November, saying ECB committees had been “tasked” with preparing further measures was a precursor to the announcement of quantitative easing in January. On Thursday in Malta, Draghi said the committees have been given their orders again and that the ECB wanted to be “vigilant,” echoing his predecessor Jean-Claude Trichet’s preferred signal for an imminent policy change. Investors took the hint, sending the euro tumbling and German bond yields to a record low — and economists debating whether policy makers will cut rates, expand QE, do both or even more. An emerging-market slowdown is dragging on global trade and a rising currency is putting further downward pressure on an inflation rate that dropped below zero last month. Bloomberg article.
China stabilizes on shaky pillar, making more stimulus likely
China’s economy is relying on the shaky pillar of financial services, making more stimulus likely. While authorities won’t unleash the same flood of credit that followed the 2008 financial crisis, more targeted steps to get money flowing to jump start infrastructure projects are on the way. Unlike global peers, the People’s Bank of China still has room to cut interest rates. Recently announced efforts also include a tax cut for vehicle purchases and a reduction in the minimum down payment for first-time home buyers. The financial industry surged 16.1 percent in the third quarter from a year earlier despite the Shanghai Composite Index plunging 29 percent. That boost to growth endured in part because trading volume for shares in the benchmark was more than double the same period a year earlier, even as it fell about 25 percent from the second quarter. Because stocks started soaring in the fourth quarter of 2014, a higher base effect looms for the final three months of this year. That makes it all the more urgent to boost the flagging industrial and construction sectors if Premier Li’s growth goal is to be achieved. By Enda Curran (Bloomberg). Bloomberg article.
Switzerland sets leverage ratio at 5% for UBS, Credit Suisse
Switzerland instructed UBS Group AG and Credit Suisse Group AG to hold capital equal to 5 percent of assets, raising the bar on a rule designed to protect taxpayers from having to bail out banks. The decision came just hours after Credit Suisse announced a capital increase of 6.05 billion Swiss francs ($6.3 billion) as part of an overhaul that will help the bank comply with the new rule, known as the leverage ratio. Both banks had pressed the government in recent months for easier terms. At least 3.5 percent of the capital must be of the highest quality, or common equity Tier 1. The remaining 1.5 percent must be in Tier 1 instruments that would be converted or written down if the CET1 ratio falls below 7 percent, according to a separate statement from Finma, the Swiss financial regulator. Bonds that fulfill this requirement are known as high-trigger or “going- concern capital.” On top of this, the banks must hold 5 percent of loss- absorbing debt, measured in terms of total exposure. The implementation of the high-trigger standard may exclude 6.1 billion francs of Credit Suisse’s 11.5 billion francs of outstanding Tier 1 notes, based on its latest earnings presentation. Just over half of UBS’s about 5 billion francs of AT1s have a 7 percent trigger, based on Bloomberg data. “For existing capital instruments which can no longer be issued as eligible under the new requirements, transitional provisions are envisaged in the sense of grandfathering,” the government said in a separate statement. The banks have until the end of 2019 to satisfy the requirement, the government said in a statement Wednesday. Swiss National Bank President Thomas Jordan said he doesn’t expect the new rule to hurt the economy. It will instead improve “the stability of the Swiss financial system and the economy as a whole,” said Mark Branson, head of the financial regulator Finma. By Johannes Koch (Bloomberg). Bloomberg article.
Swiss watch quarterly exports decline the most since 2009
Swiss watch exports had their biggest quarterly decline since 2009 as the industry struggles with the strong franc and concern that competition from Apple Inc.’s smartwatch may be denting demand for low-end timepieces. The value of shipments fell 7.2 percent in the third quarter, adjusted for working days, the Swiss customs office said Tuesday in a statement. Exports to the U.S. fell 18 percent in September, their steepest monthly drop in five years, according to the Federation of the Swiss Watch Industry. The monthly decline was worst for timepieces with export prices of 200 francs ($209) to 500 francs, according to the trade group. The drop “casts something of a shadow over prospects for the year,” the federation said. Watch shipments make up about a tenth of Switzerland’s exports. The nation’s watch executives are the most pessimistic in four years as an increasing minority sees a threat from smartwatches, a Deloitte LLP report showed last month. LVMH Moet Hennessy Louis Vuitton SE will start selling a TAG Heuer smartwatch next month, while Swatch Group AG unveiled a namesake watch that can make mobile payments in China last week. By Corinne Gretler and Thomas Mulier (Bloomberg). Bloomberg article.
Anti-Immigrant party soars in Swiss vote on foreigner anxiety
The Swiss People’s Party won its best result ever in Sunday’s election, capitalizing on voters’ unease about an influx of foreigners just as Europe faces its biggest refugee crisis in decades. The anti-immigrant, fiscally conservative SVP won 65 seats in Switzerland’s lower house, up from 54 in 2011, according to the Federal Statistic’s Office, which show the party got 29.4 percent of the vote. That’s ahead of the Social Democrats, who fell to 43 seats, and the pro-business Free Democrats, or FDP, which advance to 33 seats. A poll for Swiss broadcaster SRG forecast such a shift, with the SVP coming in first. The SVP’s previous best showing in the 200-member lower house was in 2007, when it won 62 seats on 28.9 percent of the vote. “Those who voted FDP did so because of the strong franc and because of the difficult economic situation, and those who voted SVP did so because of concerns about immigration and asylum seekers.” Conservative parties’ heightened appeal comes in response to high immigration from the neighboring European Union in recent years and after the economy lost steam due to of the strength of the franc, raising the prospect of increased unemployment. About a quarter of the country’s 8 million inhabitants aren’t citizens. Gains came at the expense of smaller competitors, with Christian Democrats, or CVP, probably coming in at 28 seats and green parties also declining. The Bourgeois Democratic Party of Finance Minister Eveline Widmer-Schlumpf, previously a member of the SVP, lost two seat and now has seven in the lower house. Swiss broadcaster SRF publishes projections for seats in lower house: SVP wins 65 seats, plus 11, SP wins 44 seats, minus 2, FDP wins 33 seats, plus 3, CVP wins 28 seats, minus 1, Greens win 10 seats, minus 5, GLP wins 6 seats, minus 6, BDP wins 8 seats, minus 1. NOTE: Lower house has 200 seats. By Catherine Bosley (Bloomberg). Bloomberg article.
Swiss company news
Roche Holding (ROG VX) – Third-quarter revenue gains 6% on cancer drugs sales
Roche Holding AG, the world’s biggest maker of cancer drugs, reported a 6 percent increase in third-quarter revenue as sales of medicines for breast tumors climbed. Sales on a constant currency basis increased to 11.9 billion Swiss francs ($12.4 billion) from 11.8 billion francs a year earlier, the Basel, Switzerland-based company said in a statement on Thursday. That compared with the 11.8 billion-franc average of 10 analysts’ estimates compiled by Bloomberg. Roche doesn’t report profit figures for the three months ended Sept. 30. The Swiss drugmaker, which has embarked on a number of late-stage clinical trials this year as it counts on new products to offset generic competition to its aging cancer blockbusters, also raised its forecast for annual sales. Next year, it plans to seek regulatory approval for an experimental multiple sclerosis drug that shows promise in some hard-to-treat patients, as well as a cancer treatment that harnesses the power of the immune system to fight lung and bladder tumors. By Johannes Koch (Bloomberg).
Credit Suisse Group AG (CSGN VX) – Credit Suisse profit misses estimates on investment bank
Credit Suisse Group AG reported third-quarter profit that missed analyst estimates because of a loss in the investment bank and a bigger-than-expected drop in private banking and wealth management. The shares fell. Net income decreased 24 percent to 779 million Swiss francs ($815 million) from 1.03 billion francs a year earlier, the Zurich-based company said in a statement Wednesday, citing a “challenging market environment and lower client activity.” The average estimate of seven analysts in a Bloomberg survey was for 858 million francs. The investment bank posted a pretax loss of 125 million francs, contributing to a year-on-year decline in return-on- equity to 7.1 percent from 9.7 percent in the third quarter. The stock fell as much as 4.5 percent and was trading 2.7 percent lower at 24.23 francs at 9:10 a.m. in Zurich. Chief Executive Officer Tidjane Thiam, brought in to rebuild investor confidence, is seeking to boost returns under pressure from tougher capital requirements and record-low interest rates. A market rout over the summer ensnared assets from junk bonds to emerging-market currencies, denting results at U.S. banks. In a separate announcement on Wednesday, Credit Suisse said it plans to increase its capital by about 6.05 billion francs, including a rights offering and a private placing. It also outlined plans for 3.5 billion francs of cost savings by the end of 2018 and other strategic measures. By Jeffrey Vögeli and Giles Broom (Bloomberg). Bloomberg article.
Swatch Group (UHR VX) – Bond’s favourite watch tackles $6,000 mission: Millennials
A bigger threat than smartwatches is no watches at all, according to Omega President Stephen Urquhart. The maker of luxury watches — some tied to the James Bond movie franchise — that sell on average for more than $6,000 is trying to attract younger consumers. More than half of 16-34 year-olds use a mobile phone as their main way to tell the time, according to a YouGov poll. “For me, that’s a bigger challenge than smartwatches: to make sure that we are reaching out to them for a product that has this image of being their parents’ sort of world,” Urquhart said in an interview in Zurich. Swiss watchmakers already face a growing list of challenges: a three-year crackdown in China on extravagant spending, the surge in the Swiss franc, and competition from newcomer Apple Inc.’s smartwatch. Attracting younger clients is a key part of the strategy of the company, which is owned by Swatch Group AG. Swiss watch exports fell 7.2 percent in the third quarter, their biggest decline since 2009, federal customs data showed Tuesday. The watchmaker selected Eddie Redmayne, a 33-year-old Oscar-winning U.K. actor, as a brand ambassador in May to join George Clooney, who is 54, and Nicole Kidman, 48. Omega’s affiliation with the James Bond franchise, for which it’s selling two limited editions this year, also helps as the 007 agent appeals to millennials even though the franchise is six decades old, Urquhart said. By Corinne Gretler (Bloomberg). Bloomberg article.