“Investors are mulling over the record first-quarter loss announced by the SNB. Mostly from their stock portfolio”, former trader Richard Breslow said Friday, in his daily missive.
Market participants, Breslow says, are “wondering what the implications [are] as other central banks think about getting into the equity investment game”.
Maybe. Or maybe that just makes for a compelling angle at a time when the investing public is fixated on central banks’ increasingly “creative” efforts to support the global economy and ensure orderly market functioning amid an unprecedented crisis.
The Swiss National Bank’s equity holdings can’t really be viewed in the same light as, for example, BoJ ETF buying, or any equity purchases developed market central banks may or may not make going forward. The SNB’s balance sheet has to be viewed through the lens of FX interventions, of course. It’s not some backdoor bailout of US equities, and I would argue that trying to cram this into any “moral hazard” discussion is akin to pounding a square peg into a round hole.
Still, “SNB reports big loss” makes for compelling headlines, so it’s worth noting that the loss on the SNB’s massive hoard of foreign currency holdings was indeed quite large, at CHF41.2 billion.
Here’s the breakdown from the statement documenting first quarter results:
Interest and dividend income totaled CHF 2.1 billion and CHF 0.7 billion respectively. A gain of CHF 5.1 billion was recorded on interest-bearing paper and instruments. By contrast, the unfavorable stock market environment led to a loss of CHF 31.9 billion on equity securities and instruments. Exchange rate-related losses totaled CHF 17.1 billion
So, yeah. Plunging equity prices resulted in a near 32 billion franc hit. The bank did enjoy a three billion gain on its gold holdings, though.
As a reminder, the SNB’s holdings of US equities touched a record near $100 billion in the fourth quarter of 2019.
As the SNB will be happy to remind you if you want to ask, they are not stock pickers. And they’re not trying to “outperform” anybody, really. Without delving too far into the weeds, they’ve accumulated a huge pile of foreign exchange holdings over the years and their giant US equity book is a reflection of that.
In previous selloffs (e.g., the early 2018 rout precipitated by the blowup in VIX ETNs and the Q4 2018 near-bear market), the portfolio has suffered materially.
“The first quarter of 2020 was dominated by the global spread of coronavirus”, the SNB said, in a statement. “The measures taken to contain the pandemic seriously impacted the financial markets from mid-quarter onwards, and accordingly also the SNB’s results”.
Ultimately, the bank reminds you that its financial results depend almost entirely on developments in gold, FX and capital markets more generally. “Strong fluctuations are therefore to be expected”, they add.
Expected, yes. But still good for a headline (or five).
Finally, if you’re wondering whether huge losses are going to stop the SNB from intervening to arrest franc strength, the answer is no.
“The bank will continue to acquire foreign currency as it sells francs to weaken the currency, as can be seen by the recent sight deposit data which points to increased currency interventions in recent weeks”, UBS said this week. “For the SNB making a profit is not the goal, trying to prevent a rapid rise of the franc is their main target, and it’s ready to accept losses to do this”.
