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DIVISION OF II B O A R D OF eOVI February 23> 1962 No, 40 1 i CAPITAL MARKET DEVELOPMENTS ABROAD Io Switzerland IIo Nine Charts on Financial Markets Abroad OF RICHMOND Io Switzerlandg Money and Capital Markets in January The short-term money market eased in early January with the disappearance of year-end requirements for currency and window dressing, and recourse to National Bank credit declined sharplyo There was a further easing of the market in early February„ Rates paid on 3-month deposits dropped from 2-l/U per cent in December to 2-1/8 per cent in January and subsequently to 1-7/8 to 2 per cent in mid-February, Covered interest arbitrage between the Swiss 3-month deposit rate and the U.S, 3-month Treasury bill did not yield incentives in January and February sufficient to induce movements of funds* Yields on long-term government bonds fluctuated between 3*02 per cent and 2„97 per cent in January and early February, Industrial stock prices fell 3 per cent in the week ended January 12, and showed little variation in the next four weeks, Swiss National Bank reserves of gold and foreign exchange declined $72 million in Januaryalmost all of the drop occurring in the first .week of the month as commercial banks placed abroad funds which they had repatriated in December to prepare for the year-end balance sheet. In the first week of February the Federal Government increased its short-term v foreign investmentso, and the National Bank's reserves declined $kl million, The spot dollar strengthened markedly against the Swiss franc in Februaryj, rising from about SF U„3l8 at the end of January to SF U»329 on February 20» This was the highest quotation for the dollar in Switzerland since early last June» The stronger showing of the dollar and an accompanying rise in sterling were attributed to commercial demand „ The discount on the 3-month forward dollar widened during January and reached '. 0o99 per cent per annum on February 2$ but, it decreased to 0=69 per cent on February 16, The price of gold coins dropped from the January highs in early February „ Ever greater concern is being voiced in Switzerland over the extent of demand pressures in the economy0 Both consumption and investment demand have been strongs and since the spring of 1961 prices have advanced appreciablyo For January of this year«, the consumer price index; and the wholesale price index weres respectivelys 3*9 and 3,1 per cent higher than a year previous» Such increases have been highly unusual for Switzerland, '• The foreign trade deficit expanded to $6>6 million in 1961 from $3f>3 million in I960, mainly because of a 21 per cent rise in importss and this also has caused some concerno NOT FOE PUBLICATION - 2 - As a result, private business interests have taken steps to hold down the rise in prices0 In recent weeks, industry-wide agreements to hold prices at present levels were made by firms in the paper, cellulose, cement, aluminum and several other industries0 Three Swiss trade and industry associations have issued a joint statement urging business, labor and government to take a number of steps to curb inflation. The recommended measures include the postponement of less-urgent investment programs, concentration on labor-saving investments, no further reductions in working hours, and restraint in wage demands and in price matters0 The associations are prepared to discuss measures with labor groups„ Labor unions are said to be in favor of price and rent controls„ A mid-February jreport in the British press states that the Swiss National Bank has discussed with commercial banks and industrial bodies the question of a reduction in investment outlays, which might be realized through a "gentleman's agreement" to limit bank credit. Prices of bank stocks declined in early February, partly because of a belief that banks' lending policies would become more conservative with a tightening of credit availabilities. Money market <> The short-term money market eased in early January with the disappearance of the year-end requirements for currency and window-dressing o Rates on 3-month deposits fell to 2-1/8 per cent from the 2-l/U per cent paid in December. (See Table and Chart 5«) As currency flowed back to the banks, the freely-utilizable balances with the National Bank held by banks, trade and industry (in practice, almost entirely by the banks alone) rose from the 1961 low of $360 million on December 22 to nearly $500 million on January 15. Banks' recourse to National Bank credit fell $12 million in the first two weeks of January. The early days of the month saw the reversal of swap transactions with the National Bank entered into by the commercial banks at the end of December in order to obtain liquid Swiss "franc funds. These swaps involved $25 million equivalent of short-term Federal Government securities, and $65 million of foreign exchange, held by the banks. The interbank call loan rate held at 1-l/U per cento However, the significance of this rate is limited• Even in times of market tightness, activity in the call loan market remains extremely small. There was a further easing of the market towards the close of January and in early February, concurrently with increased foreign interest in Swiss francs. Rates on 3-month deposits were reported to have fallen to 1-7/8 to 2 per cent by February 15, at which time the banks' freelyutilizable balances with the National Bank stood at around $550 million. During January there was a widening of the net incentive, on a covered basis, in favor of the Swiss 3-month deposit rate over the U.S. 3-month Treasury bill, because of a rising discount on the 3-month forward dollar. (See Table«,) A small incentive of 0.20 per cent per annum in favor of the U.S. bill appeared on February 16 as a result of a higher U.S. bill NOT FOR PUBLICATION NOT FOR PUBLICATION '" - 3- rate, a lower Swiss deposit rate, and a reduced discount on the forward dollaro However, the covered-interest arbitrage for Euro-dollar deposits in London provided a much higher return than the U.S. Treasury bill, as may be seen in the following weekly figures (in per cent per annum) on covered-interest arbitrage for Swiss residents (with respect to 3-month bank deposits in Switzerland)s Jan» 5 12 19 26 Feb. 2 9 16 UoSo Treaso bill Euro-dollar deposit +0.08 -0,13 -0.27 -0.31 -0,32 -0.0U +0.20 +0.8U +0°50 +0.U0 +0,37 +0,39 +0.62 +0,68 The higher yield on Euro-dollar deposits may explain the press reports of a continuing flow of European short-term funds to London« Bond market. There was good demand for bonds in January. The yield to maturity on the SwissJ3onfederation 3 per cent bond of 1967-7U fell from 3 per cent on December 29 to 2.97 per cent on February 2, (See Chart 6.) The yield subsequently rose again to 2.99 per cent on February 16 The Swiss National Bank reports that during January there was an exceptional increase in savings accounts with savings banks. Stock market. Industrial stock prices declined 3 per cent in the week ended January 12 in a market dominated by profit taking. (See Chart 7») Movements were very narrow during the next four weeks, and the Swiss National Bank industrial index for February 9 was virtually unchanged from that for January 12. Industrial Share Index (195b = 100) 1961-Jan. 6 (low) June 16 (high) Aug. 25 Dec. 8 29 197 285 232 280 279 1962-Jan. 5 12 19 26 Feb. 2 9 282 273 27U 27U 270 27U NOT FOR PUBLICATION NOT FOR PUBLICATION - h - New issueso Following the December lull, new issue activity resumed in heavy volume -in"'January and early February, and all flotations are said to have been successful. The Bowater Paper Corporation, a British company, issued $13-95 million of H~l/2 per cent bonds on the Swiss market at the end of January0 This loan was reportedly oversubscribed, in contrast to the less favorable reception accorded the U per cent IBRD issue placed in Switzerland earlier in the month = The Danish Government is said to be preparing a loan on the Swiss marketo Foreign trade <, Switzerland incurred a trade deficit of $656 million in 1961, averaging $55 million per month, compared with a deficit of $353 million ($29 million a month) in 1960= Exports in 1961 were up 8.5 per cent over 1960o Imports, under the stimulus of internal demand sufficiently strong to cause domestic price rises, increased by almost 21 per cent. , Swiss Foreign Trade ($ millions5 monthly averages) Imports-c.i,f» i960 1961 Qtr.-I II III IV Exports-f.Gob. 187.0 225.7 215.L 222*9 222 oh 2U1.9 157.6 171.0 159-5 I6U0O 167.9 192.7- Balance -29. b -5U-7 -55-9 -58.9 -5U.5 -lt9.2 Foreign exchange reserves. The gold and foreign exchange reserves of the Swiss National Bank fell $6? million in the first week of January as commercial banks placed abroad funds which they had repatriated in December in connection with the year-end<, The remainder of the month ^saw small declines totaling $5 million. In the first week of February reserves dropped $Ul million, as a consequence of an increase in the shortterm foreign investments of the Confederation. There was no further loss of reserves in the second week. Swiss National Bank Reserves ($ millions) ' Gold Foreign exchange Total 1960 - Dec". 31 2,185 137 2,322 1961 - Feb. 28 Mar. 31 Sept. 23 Dec. 30 2,162 2,165 2,153 2,560 138 372 327 198 2,300 2,538 2,780 2,758 2,505 186 2,691 I'M 2,182 1§3 166 2,618 1962 - Jan. 7 Feb. ? 1 15 NOT FOR PUBLICATION NOT FOR PUBLICATION - 5 - Foreign exchange, The spot dollar in Switzerland rose from the Swiss National Bank intervention rate of SF U=>315 on December 26 to SF U»321 on January 2 and then fell back slightly, fluctuating narrowly between SF Uo317 and SF li@3l8 in the last half of the month, (See Chart 8,) There was a marked strengthening during February, and dollar quotations in mid-February were the highest since early last June, On February 20 the dollar was quoted at SF lu329o The Swiss National Bank attributed the strengthening of the dollar, as well as a stronger showing by sterling, mainly to commercial demand<> On the Swiss market, the spot pound reached SF 12ol8 on February 16 after having oscillated around SF 12,13 during Januaryo The discount on the >month forward dollar increased during January, reaching 0,99 per cent per annum on February 2 compared with 0,38 per cent on December 22<, (See Table and Chart 9») It subsequently declined to 0,69 per cent per annum on February 160 The discount on 3-month forward sterling, which had increased from 3*36 per cent per annum on December 22 to 3,63 per cent on January 13, decreased to about 3»U per cent on February 17 The price of the "Vreneli" gold coin, which had moved up in December and January, fell from SF 37<>25> on January 26 to SF 3607£> on February 2 (see Table), simultaneously with a fall in the price of gold coins in Paris. It is reported that by mid-February the price had fallen further to about SF 36,2$o In January, the Swiss Government renewed holdings of approximately $23 million equivalent of 3-month Swiss franc-denominated U0S0 certificates of indebtedness. In October 196! the U0S„ Treasury had placed with the Swiss Government approximately $U6 million of such certificates, to acquire Swiss francs for the operations of the Stabilization Fund, One-half of the original placement was not renewed» Europe and British Commonwealth Section» IIo Nine Charts on Financial Markets Abroad Chart 1 - Interest Arbitrage, United States/Canada Chart 2 =» Interest Arbitrage, New York/London Chart 3 - Interest Arbitrage for German Commercial Banks Chart U > Interest Arbitrage, Frankfurt/London Chart - Short-term Interest Rates Chart 6 - Long-term Bond Yields Chart 7 - Industrial Stock Indices Chart 8 ~ Spot Exchange Rates -- Major Currencies Against U0S0 Dollar Chart 9 - 3-month Forward Exchange Rates NOT FOR PUBLICATION Switzerland: Money Rates, Exchange Rates3 and Gold Price Interest arbitrage for U 0 S 0 Treasury bill U.S. IncenSwiss ' ZncenTreas. '3-mo. tive for 3-mOo tive for bill Swiss non-Swiss deposit Swiss yield franc resident rate resident 2.21 0.08 +0.32 2.13 +0.25 2.30 2.25 0.05 +0.60 .38 1.93 -o.U5 +0.59 1.98 -0oU0 .38 —0 0O8 +0 eU6 2.17 15 .25 22 2.22 3.60 +0.38 -0,03 .25 2.16 29 2.67 >0.51 -0.09 .25 2.21 0.08 1962-Jan. 5 2.7k' +0.53 .13 12 2.00 ,76 +0.76 -0.13 .13 1.86 19 -0.27 ,71 +0.85 2.13 26 ,67 +0.88 -0.3U 1.79 Feb. 2 1.68 ,67 +0.99 -0.32 ,72 +0.76 9 1.96 5/2Ooo -0.0k 16 2.1U s/l.9h 0.20 .83 +0.69 a/ "Vreneli" 20-franc piece containing approximately 0.1867 gold, or $6.53 at $35 per ounce. b/ Estimated. c/ Based on press reports. 196l-Nov. 17 2U Dec. 1 2.53 2.55 2.53 2.57 2.63 Spot $ (in SF's) - Spot £ (in SF's) 6 - Gold L.32L 12.173 L.322 12.166 U O 317 12.139 Uo3l6 12.131 U.315 12.125 Uo315 12.110 1,316 12.118 k.319 12.136 Uo318 12.135 L.317 12.138 U.317 12.137 L.320 12.150 U»32U 12.170 L.327 12.181 troy ounces of fine Switzerland; Selected Capital Market Statistics Capital market 'yields Deposit cert's Long-term 12 cangovt. tonal large banks bonds banks 3.12 .2.83 '3.01 2.98- 3.00 3.00 Feb. 2 3.00 2.99 3.02 2.98 2.97 2.98 2.99 ,31 ,29 ,3U ,3U »3U >3h 3.3U 3.25 3.27 3.27 3.27 3.27 >3h .35 35 3.27 3.29 3.29 New issues (millions $'s, monthly ave. or month) Swiss bonds I960 Qtr. I II III IV May June July Aug. Sept. Oct. Nov. Dec. 17 0 3 19.8 2U.0 17.6 19.6 18 13 23 17 7 33 38, lU.l 2.1 Swiss stocks Fgn. bonds 3.8 7 1U 6 '1 10 18 25 15 18 1U 17, 6, 12, 2, 2, 0.9 0.6 1.2 2.1 16.3 18.0 1*2.0 7.0 7=0 20.9 10.5 11.6 Total 31.8 U5o7 6L.2 39.9 39.5 39.1 U2.6 hhoO 61.9 15.3 Ulo3 60.2 26.6 30.0 1 INTEREST A R B I T R A G E , U N I T E D S T A T E S / C A N A D A ithursday figures T H R E E - M O N T H TREASURY BILL RATES RATE DIFFERENTIAL A N D F O R W A R D C A N A D I A N D O L L A R SPREAD IN FAVOR Of CANADA + A F O R W A R D RATE ,yA W p v - X j t RATE DIFFERENTIAL W I T H F O R W A R D E X C H A N G E COVER ' NET INCENTIVE IN fAVOR Of CANADA + I n t e r e s t arbstpage, new y o r k / l o n p o n Friday t i g u f t _ Pi 3 - M O N T H TREASURY BILL RATES \j/V\ iU|0_OOltAI BATE-LONDON RATE DIFFERENTIAL A N D j 3 - M O N T H F O R W A R D STERLING -SIS'<! i 1 RAT E DIP FERE " F O P I W A R D EXC . Si SPREAD IN 'FAVOR Of L O N D O N - INI - y T V IN I A V O R 1)f N E W 11 M •M j 11 11 1 1 11 5 D 195? M J m o • ! 1 l_A 1 1 I | I i 11 D * J 1961 - S 11 D ii * 11 'V Mt2 1L 11 $ D 4 INTEREST A R B I T R A G E FOR G E R M A N C O M M E R C I A L B A N K S 3 - M O N T H TREASURY B l L I S , I N T E R B A N K L E N D I N G RATE A N D EURO D O L L A R D E P O S I T R A T E s l zr\.6il«AH T ~] [T INTtEIANK L O A N RATI JU§0-D0llA|_1_ 1 Vr"\ L A. RATE D I F F E R E N T I A L A N D F O R W A R D DEUTSCHE M A R K I N T t l l A M L O A N RATE RATE D I F F E R E N T I A L W I T H F O R W A R D E X C H A N G E COVER S M S Chort 4 INTEREST A R B I T R A G E , F R A N K F U R T / L O N D O N ~ 3 - M O N T H TREASURY BILLS A N D INTER B A N K L E N D I N G RATES RATE DIFFERENTIAL A N D | - 3 - M O N T H FORWARD STERLING RATE DIFFERENTIAL W I T H FORWARD EXCHANGE COVER NET INfENTIVI drUNITID ilNGDOM OVER!/ N L O N G - T E R M B O N D YIELDS CANADA ./V 1**1 Vk ^ • S H O R T - T E R M INTEREST RATES * tUBO-DOUAl • LONDON T 6 5 I \ CANADA t |W^ S ' 2 1 1958 1959 19 60 1961 3-month Ireotury bill rolei lor oil couniriei except Jopan (3 month interbank depoiti rale) and Switzerland (3-month depoiit rale) . , 3-month rale lor U. S dollar depoim in London 1962 I N D U S T R I A L STOCK I N D I C E S 6 100 100 No#*: japan: Index of oil *tock* Tokyo exchongi SPOT EXCHANGE RATES - M A J O R CURRENCIES AGAINST U . S . DOLLAR FRENCH FRANC I960 •1<" 3 - M O N T H F O R W A R D E X C H A N G E RATES A G A I N S T U. S. DOLLARS [ A G A I N S T P O U N D STERLING - L O N D O N A G A I N S T P O U N D STERL N G - L O N D O N flANC A
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