The "biggest surprise" overnight was the "breakout move" in the euro/Swiss franc currency pair which hit €1.2270 – the highest level in over a year – on "growing investor confidence" in the euro zone's financial situation, per BK Asset Management.
Recall the Swiss became one of the world's biggest buyers of foreign reserves last year as the central bank refused to allow the currency, benefitting from safe-haven flows out of the euro zone, to appreciate beyond €1.20; the super-strong Swissie was seen as a threat to tourism and exports, two of Switzerland's most important industries.
Now, the pressure is starting to come off; renewed confidence in the euro zone is supporting the unwind trade, bolstering the euro and opening "the path to late 2011 highs near the 1.2400 level," notes BK; "With periphery sovereign debt yields in both Italy and Spain declining markedly over the past several months the risk of fracture has been reduced significantly. Therefore the 'euro breakup' trade is being unwound with EUR/CHF one of the key beneficiaries."
From Grexit to Crexit
Meanwhile, Peter Praet, a European Central Bank Executive Board member, deemed the current stance of monetary policy "appropriate" in an interview with MNI Monday, although he acknowledged "downside risks to growth still prevail." Last week the ECB left rates unchanged at 0.75%. Mr. Praet called upon "countries" to "underpin currently renewed confidence with effective action" to avoid being "subject to reversals because of political reasons and all that."
No signs of reversal just yet, however, with Spain's benchmark 10-year bond yield below 5% and the euro near a 12-month high against the dollar; "Given the correlation between the euro and equity markets, the euro should trade higher, towards $1.35 or $1.36," SEB currency strategist Richard Falkenhall told Reuters. This, despite Germany likely to report its economy contracted in the fourth quarter tomorrow, and after a disappointing read on November euro area industrial production.
Confidence, or complacency? Fully 87% of clients in Morgan Stanley's outlook survey are bullish on European equities for 2013.
Over to Morgan Stanley's Joachim Fels, who sees parallels between the Great Moderation (we know how that one ended) and the "Great Monetary Easing" of today:
"…the reduced volatility of equity and bond prices due to the 'great monetary easing' produces complacency and excessive risk taking, which may sow the seeds for another rude awakening further down the road," he wrote in his weekly client note Sunday. "However, as we also learned during the 'great moderation', the show can go on for longer than you think before the curtain falls."