Swiss Equities Lower As Voters Reject Tax Reform

News and Events:

Swiss government gets a slap in the face

Swiss voters massively rejected the government’s corporate tax proposal on Sunday as the text was rejected by almost 60% of voters. The reform was aimed at keeping Switzerland fiscally attractive for multinational companies and financial holdings. The solution proposed by the government did not convince the Swiss people and now forces the government to return to the drawing board. The government is now in a hurry to find an alternative solution as the current special tax regime will be abolished in 2019.

Investors did not welcome the news and Swiss equities started the week on the back foot as the reform’s rejection cast a shadow on the economic outlook. Indeed, Switzerland has a lot at stake here as several cantons base their economic models on those tax advantages. The SMI was trading in negative territory on Monday, while European equities were blinking green on the screen.

Even though it is a serious drawback for the Swiss economy, we believe it is a bit early to ring the alarm as the government still has time to come up with a plan B. They will however have to come to the table with a more balanced solution to straighten the situation. This morning, EUR/CHF held steady at around 1.0670. Investors are not yet ready yet to move away from the safe haven currency, signalling that investors are still confident that Switzerland will find a sustainable solution that will make both businesses and tax payers happy.

Strong UK data seems to persist

Financial markets will closely scrutinise the UK data due to be released tomorrow morning. We expect inflation to come in higher than the prior December figure of 1.6%. Bullish pressures on consumer prices are on the rise as we believe that the pound is still largely undervalued.

We also believe that tomorrow’s PPI, which currently stands at 2.7% y/y will increase above 3%. Looking at the data, a jarring statement needs to be made: It seems as though Brexit has in fact been the best thing for UK economics in a while.

In addition, the weak pound is definitely helping the Bank of England which has made up some time in the currency war as Brexit fears help UK exports. The cable has largely bounced back higher since reaching 1.20 in mid-January. We therefore maintain our bullish view of the pound as we believe that financial markets are still pricing in a hard Brexit. We are also reloading our bullish positions amid the ongoing UK recovery.

A hard Brexit should not happen and we believe that negotiations will take place with the EU.

Today’s Key Issues (time in GMT):

• Feb 10 Total Sight Deposits CHF, last 535.2b CHF / 09:00
• Feb 10 Domestic Sight Deposits CHF, last 463.0b CHF / 09:00
• European Commission Economic Forecasts EUR / 10:00
• Central Bank Weekly Economists Survey (Table) BRL / 10:25
• TCMB Turkey Survey of Expectations TRY / 11:30
• Jan CPI YoY, exp 3,24%, last 3,41% INR / 12:00
• Feb 10 Bloomberg Nanos Confidence, last 57,3 CAD / 15:00
• Feb 12 Trade Balance Weekly, last $212m BRL / 17:00
• Jan REINZ House Sales YoY, last -10,70% NZD / 20:30
• Jan Export Price Index MoM, last 2,90% KRW / 21:00
• Jan Export Price Index YoY, last 6,30% KRW / 21:00
• Jan Import Price Index YoY, last 9,20% KRW / 21:00
• Jan Import Price Index MoM, last 4,20% KRW / 21:00
• Jan Food Prices MoM, last -0,80% NZD / 21:45
• Feb 12 ANZ Roy Morgan Weekly Consumer Confidence Index, last 117,5 AUD / 22:30
• Jan Money Supply M2 YoY, exp 11,30%, last 11,30% CNY / 23:00
• Jan Money Supply M1 YoY, exp 20,20%, last 21,40% CNY / 23:00
• Jan Money Supply M0 YoY, exp 8,90%, last 8,10% CNY / 23:00
• Jan New Yuan Loans CNY, exp 2440.0b, last 1040.0b CNY / 23:00
• Jan Aggregate Financing CNY, exp 3000.0b, last 1630.0b, rev 1626.0b CNY / 23:00
• Jan Foreign Direct Investment YoY CNY, exp 1,40%, last 5,70% CNY / 23:00
• Jan Budget Balance YTD, exp 225.0b, last -2967.3b RUB / 23:00
• Jan Tax Collections, exp 138200m, last 127607m BRL / 23:00
• Jan Trade Balance, exp -$10265.0m, last -$10369.3m INR / 23:00
• Jan Exports YoY, last 5,70% INR / 23:00
• Jan Imports YoY, last 0,50% INR / 23:00

The Risk Today:

EUR/USD‘s selling pressures continue. the pair has broken strong hourly support given at 1.0620 (30/01/207 low) before bouncing back higher. The break of this level should pave the way towards stronger hourly support at 1.0581 (16/01/2016 low) and 1.0454 (11/01/2017 low). Expected to see continued decrease. In the longer term, the death cross late October indicated a further bearish bias. The pair has broken key support given at 1.0458 (16/03/2015 low). Key resistance holds at 1.1714 (24/08/2015 high). Expected to head towards parity.

GBP/USD is still trading below resistance given at 1.2771 (05/10/2016 high). The technical structure suggests that the pair should back bouncing lower towards support given at 1.2254 (19/01/2016 low). The long-term technical pattern is even more negative since the Brexit vote has paved the way for further decline. Long-term support given at 1.0520 (01/03/85) represents a decent target. Long-term resistance is given at 1.5018 (24/06/2015) and would indicate a long-term reversal in the negative trend. Yet, it is very unlikely at the moment.

USD/JPY continues to bounce since it reached support at 111.36 (28/11/2016 low). Hourly resistance is given at 115.62 (19/01/2016 high). The break of hourly support given at 112.57 (17/01/2017 low) has confirmed bearish pressures. We favor a long-term bearish bias. Support is now given at 96.57 (10/08/2013 low). A gradual rise towards the major resistance at 135.15 (01/02/2002 high) seems absolutely unlikely. Expected to decline further support at 93.79 (13/06/2013 low).

USD/CHF‘s medium-term momentum is still bearish despite ongoing increase. Key resistance is given at a distance at 1.0344 (15/12/2016 high). We believe that the road is nonetheless clearly wide-open for further decline if the pair gets back below parity. In the long-term, the pair is still trading in range since 2011 despite some turmoil when the SNB unpegged the CHF. Key support can be found 0.8986 (30/01/2015 low). The technical structure favours nonetheless a long term bullish bias since the unpeg in January 2015.