Switzerland Is The Troubled Magnet For Flight To Safety Funds Spooked By Argentina

Swiss assets are gaining from the flight to safety trade. The situation in Argentina is just the latest driver of these flows.

A flight-to-quality, sometimes called a flight-to-safety, is a phenomenon witnessed in the global financial markets that arises when investors decide to sell and hence, exit what they perceive to be higher-risk investments and seek higher quality, low risk investments.

Events in Argentina this past weekend has seen the market friendly and fiscally disciplined President Mauricio Macri suffer a massive defeat in primary elections. This has led investors to hurriedly exit the stock market the S&P Merval which fell over 37% on August 12, as well as the bond and currency markets.

The sentiment is that the presidential election that will be held on October 27 and if needed a runoff on November 24 will see the Justicialist Party sweep to victory and so pursue a policy that mixes socialism, left-wing nationalism and radicalism. This has left the global investment community expecting that the free spending populists will lead the country to another default.

As such safe have assets have seen a surge in demand in the past 24-hours leading to the most popular troubled time asset i.e. gold rising by 1.37%. The highly liquid two-year bonds issued by the U.S. and Germany have seen their yield fall by two basis points or 0.02%.

One can understand the surge in gold prices as investors in the precious metal show a desire for the asset class that is beyond simple returns. With so many pressure points in the world, trade, Iran and now Argentina they will not be distracted by arguments over relative value as gold trades over $1,500/Troy Ounce.

The amount of potential problems the global economy faces can create a sense that only gold has value as nothing else is going to work. Almost every scenario is gloomy and having gold as a large portion of one’s portfolio buffer makes good sense.

However, once again it is Switzerland that is proving to be a major draw for global investors in currencies and bonds. The Swiss Franc has gained 0.20% against the U.S. Dollar and 0.11% against the Euro by the middle of the European trading session. Swiss government bonds from three to 50-years have all seen their yields decline on average by two basis points.

This is placing even more pressure on the Swiss National Bank than I have previously noted as the nature of the Swiss economy is that the currency surge means it is no longer running like a precision Swiss timepiece.

Exports accounted for 72% of Swiss GDP in 2018 and the principle exports markets are: Germany (19.5%), U.S. (12.4%), Italy and France (each 7.5%) and the Broader European Union.

Having a substantially stronger currency—year to date gain is +1.73% against the U.S. Dollar and 3.52% against the Euro—is worrying for the economic prospects of Switzerland. To compound this fact, one should consider that the stronger Swiss Franc makes imports more affordable. In 2018 they were a drag of 60% on GDP and so currency gains against its two largest trade partners for imports, EU 72.9% and U.S. 6.4% does not auger well for Swiss economic prospects.

I am labouring the point as Switzerland is firmly integrated into the global trade network and the importance of international trade to Swiss prosperity cannot be denied. Therefore, it is essential to raise a concern over the flight to safety impact i.e. the lift to the Swiss Franc and Swiss assets.

The entire Swiss yield curve from overnight deposits to 50 years is offering a negative yield. One should expect lower Swiss bond yields to persist for an extended period as global investors continue to show interest in placing their newly acquired Swiss Franc into tangible assets.

The low rates reflect the slide in inflation as the annual rate fell to 0.3% in July 2019, the lowest since July 2017, from 0.6% in the previous month and below market expectations of 0.5%.

The Swiss consumer confidence index increased to -8 in the third quarter of 2019 from a revised level of -9.3 in the previous period. This was in line with market forecasts. This is still highly subdued.

The weak sentiment is due to households’ budget situation, with both the past (-13 points) and anticipated financial situation (-8 points) being well below average (average: -6 points and +2 points respectively). Therefore, with deflation looming on the horizon the likelihood of consumers making major purchases has, unsurprisingly, also remained below average.

The issues in Argentina have created yet another headache for the Swiss banking authorities.


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