European Indexes Weaken Further; Switzerland Defends Euro-franc Rate

Arjun Dave
06 Sep, 2011
New York City

European markets declined and banks led the losers across the region. Italy faced a wave of protests as lawmakers debated second austerity measures of 46 billion euros. Swiss central bank set the cap on euro-franc exchange rate that may prove costly.

[R]5:00 PM Frankfurt – European markets declined and banks led the losers across the region. Italy faced a wave of protests as lawmakers debated second austerity measures of 46 billion euros. Swiss central bank set the cap on euro-franc exchange rate that may prove costly.[/R]

The European markets opened higher but turned lower after the New York markets declined more than 2% in the first thirty minutes of trading. The indexes were under pressure for the second day of this week.

Italy faced a wave of demonstrations and strikes as lawmakers debated the 46 billion euros austerity measures. Milan airport was nearly at a standstill after Alitalia canceled 250 flights and metro rail in Milan and other cities were shut down.

The strike organizers claimed more than one million people participated in demonstrations across the nation and 55% of workers in major cities stay away or could not reach to work.

The Swiss franc lost as much as 8.5% in the late afternoon trading after the Swiss National Bank held out upper limit for the currency and said it will defend the franc with the “utmost determination.”

The decision to defend the franc may turn out to be expensive for the central bank as the uncertainty in the euro zone and in the U.S. rise. A team of negotiators from Germany, Finland and other nations failed to agree on the collateral terms with Greece and that added to another layer of uncertainties.

The premium to Greek 10-year bonds compared to German bonds of equivalent maturities increased to 1,671 basis points and yield premium for the Italian bonds rose to 368 basis points.

The CAC-40 index closed down 1.1% or 33.90 to 2,965.64 and DAX 30 index declined 1% or 52.21 to 5,193.97. The benchmark index in Milan declined 2% to 14,049.70 and in Spain fell 1.6% to 7,936.40.

The Swiss Market Index soared 4.4% to 5,367.24 after the Swiss National Bank said it is prepared to spend “unlimited” amount of money to defend the currency rising from the upper limit it established.

The SNB in a statement released from its Web site said “it will no longer tolerate euro-franc exchange rate below the minimum rate of 1.20 francs” and also added its resolve to fight the currency appreciation and “is prepared to buy foreign currency in unlimited quantities.”

The Swiss franc declined 8.4% to 1.202 euros and dropped 8.4% to 85.60 centimes against one dollar.

Prior to the release of the statement the euro traded at 1.10 francs and in August the central bank dropped interest rate to zero and flooded the market with liquidity. The franc has appreciated more than 26% in the ten months to August.

The recent strength in the Swiss franc has weighed heavily on the Swiss economy and the government lowered its estimate of the economic growth to 1.5% in 2012 from 2.1% in the current year.

The Swiss central bank may face a tough task of holding its target range and may prove it costly. The latest currency intervention between March 2009 and June 2010, when the euro rose from 1.48 francs to 1.32 francs, cost the central bank 32.70 billion francs.

Stock Movers

Swatch Group AG gained more than 3% to Sfr342 after the Swiss franc declined more than 8.5% against the euro. Transocean Ltd jumped more than 9% to Sfr43.70 after the Swiss currency declined.

Banks in Europe declined for the second day this week. Italian banks were under pressure after the lawmakers debated the austerity measures and Italian President urged politicians to focus on the nation and set aside differences.

UniCredit SpA declined 4.7% to 79.30 euro cents and Banca Popolare di Milano dropped 3.7% to 1.26 euros.

Intesa Sanpolo SpA declined 3.1% to 99.70 cents.

Caja de Ahorros dropped 9% to 1.74 euros after the Spain based lender that the government is planning to sell reported first half loss.

Bayer AG dropped more than 10% to 36.18 euros after the U.S. drug regulator demanded more clinical data for the blood thinner Xarelto to treat heart stroke in patients with irregular heart beat.