Sunday, October 22, 2017

"For Switzerland’s Central Bank, $30 Billion in Profits but Not Much Reward"

Following up on September 21's "Update On Speculation In the Stock of the Swiss National Bank (SNBN)":
This is an extra-special type of lunacy.

From the Wall Street Journal. Oct 6:
Swiss National Bank data point to big third-quarter profit later this month, but it is limited in what it can do with it
Imagine being a money manager sitting on profits of over $30 billion in the third quarter alone that you can’t cash in. Welcome to the topsy-turvy world of Swiss central banking.

The Swiss National Bank SNBN -0.75% likely generated profits in the region of 30 billion Swiss francs ($31 billion) last quarter, based on a Wall Street Journal analysis of SNB foreign-reserves data released Friday. That’s thanks to a goldilocks combination of a weaker franc and higher prices for gold, stocks and bonds.

But the central bank can’t lock in these paper profits by selling chunks of their cache of foreign stocks and bonds without the risk of strengthening the franc, which could leave it vulnerable to future losses.

The value of the SNB’s huge foreign reserves swelled to 724 billion francs ($740 billion) in September compared with 694 billion francs at the end of June. Unlike in previous quarters, the 30-billion-franc increase probably represents profit on existing holdings, rather than any new purchases.
A number of factors have helped the SNB likely chalk up a record profit.

Firstly, separate data on sight deposits at the SNB—a proxy for intervention—were flat last quarter, suggesting the central bank didn’t intervene much, if at all, in markets to keep a lid on the franc.
The rise in gold prices, which rallied in the third quarter, would also have likely added a couple of billion francs to the SNB’s profit.

Other items such as the SNB’s Swiss franc positions could affect its gains, as could any changes to the quarter-end currency calculations used.

The SNB doesn’t release its profit figures for the quarter until Oct. 31 but they are likely to be big.
UBS economist Alessandro Bee has yet to issue a formal profit forecast but he said something along the lines of 32 billion francs is a “valid number.”

“It’s an extraordinary situation because we have a rise in gold prices and a broad-based depreciation in the Swiss franc” in addition to lower bond yields and higher equity values, Mr. Bee said.
The SNB has accumulated its huge reserves after years of foreign-exchange interventions, in which it created francs and used them to purchase foreign assets, mostly bonds but also stocks, in a bid to weaken the franc.

In recent years the franc has remained very strong, with investors treating it as a haven amid uncertainty over the global economy, easing measures by other central banks and concerns about the euro.
But in the last quarter the euro strengthened about 5% against the franc and the dollar also firmed, making the SNB’s assets worth more in franc terms.

Four-fifths of its reserves are in bonds and the other 20% are stocks, with euro-denominated assets comprising about 40% of reserves, dollar assets at 35% and the rest a mix of yen, sterling and others. The SNB’s U.S. equity holdings at the end of the second quarter included $2.8 billion in Apple Inc. shares and $2.1 billion in shares of Google parent Alphabet Inc. Its equity investments mirror broad indexes....MORE
Probably related:
The Rate of Growth of Central Bank Balance Sheets Is Rapidly Decelerating
So, Shares of the Swiss National Bank Are Up 89% Since Late July (SNBN)
The Swiss National Bank's Largest U.S. Equity Positions