Savills Share News (SVS)

LONDON (Alliance News) - Resource stocks led a recovery Thursday, after London's stock indices were sent into a temporary tailspin when the Swiss National Bank unexpectedly removed the ceiling for the Swiss franc against the euro and cut interest rates.

The move caused volatility across the markets, particularly in forex, where the euro quickly slid to an 11 year low against the dollar. The gold price rose, while equity indices across Europe dropped sharply before recovering.

The FTSE 100, which is heavily weighted in mining and oil stocks, closed the day up 1.7% at 6,498.78, the FTSE 250 ended up 0.3% at 15,915.29, while the AIM All-Share closed flat at 697.46.

The CAC 40 in Paris closed up 2.4%, and the DAX 30 in Frankfurt ended up 2.2%. At the close of London equity markets, the DJIA was trading down 0.3%, the S&P 500 was down 0.5%, and the Nasdaq Composite was down 0.7%.

The decision to scrap the ceiling took the markets by surprise, after the SNB had said as recently as December that it was committed to preventing the franc from strengthening beyond SFR1.20 to the euro. The cap was put in place more than three years ago to stem inflows of money from overseas that was pushing up the Swiss currency and hurting its export industry.

However, the central bank's interventions to defend the ceiling have become more costly in recent months, as the crisis in Ukraine and expectations the European Central Bank will reveal full blown quantitative easing to stimulate the ailing eurozone economy have prompted more flows into the franc, which is seen as a relatively safe haven. In its effort to weaken the franc, SNB had increased its foreign currency assets to CHF495 billion by the end of December, a strategy that greatly increased the bank's exposure to currency fluctuation risks.

The SNB said that although the franc was still high, its overvaluation has decreased because the depreciation of the euro against the dollar means that the franc has also weakened against the US currency. "In these circumstances, the SNB concluded that enforcing and maintaining the minimum exchange rate for the Swiss franc against the euro is no longer justified," it said.

"This is the biggest FX shocker in years and it is likely to create more volatility in the short term," said James Stanton, head of foreign exchange at deVere Group. "Once the chaotic trading has calmed and the dust on this FX shock has settled, we would expect the Euro/Swiss franc will trade at around 1.00 francs."

Immediately following the decision, the euro fell sharply against the Swiss franc, hitting a low of CHF0.8597, as the market attempted to find an equilibrium for the two currencies. The euro also hit its lowest value against the dollar since November 2003. At its lowest point, the euro traded the greenback at USD1.1567. The pound was trading EUR1.3077 when the London equity markets closed, having hit EUR1.3106 earlier in the session, its highest level since March 2008.

Michael Hewson, chief market analyst at CMC Markets, suggested that the decision shows the SNB's confidence that the European Central Bank will initiate a quantitative easing program which would depreciate the euro to a level which would make the Swiss franc peg impossible.

"The SNB appears to be acknowledging that it can’t defend its currency from any new ECB attempts to try and weaken the euro, as the ECB attempts to stimulate Europe’s sclerotic economy, and is trying to mitigate this by launching new measures to try and deter further inflows into its currency," Hewson said.

Kathleen Brooks, research director at FOREX.com agreed, adding that the ECB stimulus may be bigger than markets initially predicted.

"The SNB has close ties with the ECB. This move could be a sign that the SNB thinks (or knows) that the ECB will embark on QE at next week’s meeting, and the size of its QE programme could be bigger than the market expects – perhaps USD1 trillion, not the USD500 billion that was 'leaked' last week," Brooks said.

In order to ensure that the end of the currency ceiling does not lead to an inappropriate tightening of monetary conditions, the bank cut its key interest rate to negative 0.75%. The SNB also said that if necessary, the central bank will remain active in the foreign exchange market to influence monetary conditions.

The ECB is due to announce its monetary policy decision next Thursday.

The Swiss central bank's interest rate cut makes it less of an attractive safe haven for investors, and this helped boost the gold price, in turn sending precious metal mining stocks higher. The yellow metal reached a high of USD1,266.78 an ounce, its highest level since early September.

Randgold Resources, up 6.4%, was the biggest gainer in the FTSE 100, while Fresnillo rose 4.7%. In the FTSE 250, Polymetal International rose 9.6%, Acacia Mining closed up 4.8% and Lonmin ended up 2.6%.

"Chaos and uncertainty are the perfect recipe for improving the perceived attractiveness of gold, and both hit the markets aggressively as a flight to security from the Swiss franc-inspired bedlam surrounding Europe gripped traders," IG Market Analyst Alastair McCaig said.

Oil prices also came off their recent lows, sending oil-related stocks higher. Brent oil hit a high for the day of USD52.38 a barrel, while West Texas Intermediate reached USD51.41 a barrel.

Royal Dutch Shell 'B', up 3.5%, was amongst the best performing blue-chip stocks, as was BG Group, up 3.6%, and BP, up 2.7%.

In the FTSE 250, Afren was the best performer, up 21%, Premier Oil was up 4.2%, SOCO International up 3.6%, Cairn Energy up 4.3%, and Hunting closed up 2.9%.

Financial services companies started counting the cost of the market turmoil. IG Group closed down 4.4% at 709.50 pence, one of the worst-performing stocks on the FTSE 250, after it warned it faces a hit of up to GBP30 million.

IG Group, which provides online financial trading to clients, said its ability to recover client debts will play a part in exactly how much is lost.

"The market exposure occurred where client positions were closed at a more beneficial level than the company was able to close its entire corresponding hedge due to the market dislocation," IG Group said in a statement. "This occurs against the backdrop of very strong recent and current performance and IG's extremely robust financial position".

Retail investor platform Plus500 said the exceptional move in the Swiss franc had "no material impact" on its financial and trading position. It said it was experiencing a "profitable trading performance" on Thursday, which it attributed to the "robustness of its risk management policies and processes which effectively managed the company's exposure to the Swiss franc."

The AIM-listed company's stock still ended down 5.0% at 602.50 pence.

Experian closed as the second-best performer in the FTSE 100, up 5.3%. The information services company said it is confident of returning to a position of revenue growth as it approaches the end of its financial year, and for its full-year results to demonstrate stable margins and good progress in benchmark earnings, both at constant currency, and to exceed 95% cash flow conversion. In a trading update for the last three months of 2014 it said that revenue from continuing activities was down 1%. At constant exchange rates, growth was 2%, and organic revenue was unchanged.

Associated British Foods also performed well, closing up 2.2%. The company said it now expects a marginal fall in its adjusted earnings per share in the current financial year, as strong growth at its Primark retailer is more than offset by further profit declines in its sugar business and due to the strength of sterling. However, Liberum remains positive on the stock saying it offers compelling exposure to secular growth trends in retail over the next 10 years.

Tullow Oil spent most of the day as one of the worst FTSE 100 performers, although it recovered at the close to end up 3.8%. The oil and gas explorer said it is set to write off around USD1.6 billion of value on exploration activities and unsuccessful drilling and said impairment charges for the year will reach around USD600 million alongside an additional USD500 million loss on a disposal charge on two gas fields in the UK.

Savills ended as one of the biggest gainers in the FTSE 250, up 6.8%. The high-end real estate adviser said it expects its 2014 underlying results to be well ahead of its previous expectations after a very strong December.

The company said it had seen strong performances across its transactional businesses in December, resulting in revenue and profits significantly exceeding its previous forecasts for the month. It said the strength was driven by the the completion of a number of sizeable transactions in UK and European commercial markets, the rise in Stamp Duty announced by the UK government on residential transactions, which provided a short-term boost to volumes, and the successful close of a new Nordic Logistics Fund earlier than anticipated in its investment management business.

Spire Healthcare Group ended down 7.2% after private equity firm Cinven sold a 10% stake in the company at a discount. Cinvent sold 40.1 million shares in Spire at 315 pence per share, raising a total of GBP126.3 million. Spire shares closed trade at 315.315p.

Bovis Homes Group also fell heavily, down 6.1%. The housebuilder reported further growth in profitability, as it built and sold more houses at a higher average price. Bovis echoed peers in saying it expects to sell even more houses in 2015, although the rate of growth will stabilise after the exceptional recovery seen in 2014.

It expects "2015 will be another successful year of growth in revenue and profit giving rise to further improvement in returns". However, Numis has downgraded the company to Add from Buy, saying there is uncertainty over market conditions which has triggered lower volume and margin forecasts in 2015.

The economic calendar Friday is headlined by consumer price index readings from Germany at 0700 GMT, the eurozone at 1000 GMT, and the US at 1330 GMT. Also in the calendar is US industrial production for December at 1415 GMT, and the Reuters/Michigan Consumer Sentiment Index for January at 1455 GMT.

In the corporate calendar, JD Sports Fashion will be releasing a trading statement, as will price comparison website company Moneysupermarket.com Group, and instrumentation and controls company Spectris. Acacia Mining will issue its fourth quarter production results.

By Neil Thakrar; neilthakrar@alliancenews.com

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