Published September 06, 2011
Switzerland's central bank turned the tables on Tuesday on investors who have driven up the franc, sinking it nearly 9 percent against the euro, while European stocks added to the sharp losses of a day earlier.
Wall Street also looked set to open lower in its first trading day since Friday's moribund U.S. jobs report.
Core German debt yields stayed near historic lows, well below 2 percent, signalling a frenzied search for safety was undisturbed.
European banking stocks, battered by fears of exposure to both euro zone peripheral debt and a U.S. lawsuit over mortgage-backed securities, took another hit, adding a two-thirds of a percent loss to the near 6 percent drop on Monday.
The Swiss National Bank's move to intervene directly in markets went some way to reversing one of the recent major trends -- investors dumping euro and dollar assets for the safety of the franc. It set a target of 1.20 francs to the euro that it would enforce by unlimited buying of other currencies.
The franc has soared against the euro and the dollar as investors bought the currency as a secure place for their money given the U.S. and euro zone debt crises.
This has threatened the Swiss economy, the bank said.
After the announcement, the euro was trading at just above the 1.20 Swiss franc target after earlier being at around 1.10 francs.
The euro also firmed against the dollar and was trading at $1.4131.
"One will think twice about speculating against this target because the SNB is with its back against the wall," said Alessandro Bee, economist at Bank Sarasin.
The Swiss move rocked a number of other assets, notably gold which lost some allure to trade at $1,890 an ounce.
World stocks as measured by MSCI were down a third of a percent, getting off to a poor start with a catch-up fall of 2.2 percent on Japan's Nikkei.
The pan-European FTSEurofirst 300 was down nearly half a percent after falling more than 4 percent on Monday on renewed worries about the euro zone's ability to solve its debt problems.
"These persistent euro zone worries are back in play once again amidst signs that austerity measures may be faltering, whilst last Friday's disappointing (U.S.) non-farm payrolls (data) continue to leave the markets with something of a hangover," said Cameron Peacock, analyst at IG Markets.
At a banking conference in Frankfurt, the chief executives of both Societe Generale and Commerzbank said bank earnings would be less in the future, partly due to the euro zone crisis.
"There is a direct link between state balance sheets and bank balance sheets," Commerzbank's Martin Blessing said, adding that about 50 percent of sovereign bonds are held by local banks in most countries.
Market reaction to the euro zone crisis is being exaggerated by global concern about the state of the U.S. economy, which is in danger of slipping back into recession.
Europe's own economy is also weak.
Japanese, Chinese and South Korean financial regulators discussed the global threats in a conference call.
"We are already at stall speed in the U.S. and Europe, which means we are now more likely than not to see a recession," said Tharman Shanmugaratnam, Singapore's finance minister.