fritz zurbrugg : current developments in the financial markets introductory remarks by mr fritz zurbrugg, member of the governing board of the swiss national bank, at the media news conference of the swiss national bank, berne, 19 june 2014. * * * i will begin today by looking at the situation on the financial markets. then i will discuss structural changes on the foreign exchange and money markets which are of importance for the snb. i will close with a few comments on the progress that has been made in reforming benchmark interest rates. situation on financial markets the positive sentiment on financial markets overall has continued since the beginning of the year. on the one hand, investors have been encouraged by the fact that economic recovery has continued on both sides of the atlantic, even if it has been hesitant, as well as by mainly positive business results. on the other, the general low - interest - rate environment, with the accompanying search for yield by investors, is likely to have been a major factor. nevertheless, this positive sentiment was put to the test on a number of occasions – for instance, in january, when signs of economic weakening and political risk in a number of emerging economies gave rise to considerable uncertainty, and again in march, when the political conflict in ukraine intensified. the gradual tapering of the us federal reserve bond purchase programme, however, was taken quite calmly by market participants. in this situation, most stock market indices have registered gains since the beginning of the year. indeed, a number of indices, such as switzerland ’ s spi, the us s & p 500 and germany ’ s dax, have attained record levels in recent weeks. meanwhile, demand for sovereign bonds issued by euro area peripheral countries was high. this was attributable, first to a gradual improvement in fundamental data, but also to the fact that investors were anticipating the monetary policy easing measures introduced by the european central bank at the beginning of june. consequently, risk premia against german sovereign bonds declined again significantly. they are currently at levels last seen in 2010, before the onset of the sovereign debt crisis. sovereign bonds issued by emerging economies also benefited from investors ’ increasing risk appetite. despite the uncertainty at the beginning of the year which i mentioned before, their risk premia are now lower than at the end of 2013, apart from a very few exceptions. alongside sinking risk premia, volatility on financial markets has also decreased since the beginning of the year. chart 1 shows the standard vol

s monetary union has the essential elements of an effective currency union : an integrated economy, fiscal federalism and labour market flexibility. allow me to elaborate. bis central bankers ’ speeches an integrated economy while the composition of provincial output varies, the canadian economy is highly integrated. consider the case of commodities. when commodity prices increase, all provinces benefit. all else equal, the canadian dollar appreciates. its adverse impact on our non - commodity exports is partially offset by the fact that a stronger currency reduces the cost of productivity - enhancing machinery and equipment and imported inputs to production. 1 various mechanisms distribute benefits across provinces : fiscal policy ; increases in personal wealth through income and ownership of stock ; and movements in internal real exchange rates and interprovincial trade. 2 during the recession and its aftermath, the importance of interprovincial trade was clear. for example, the increased demand from other provinces for quebec ’ s goods and services significantly offset lost international exports ( chart 3 ). movements in provincial real exchange rates are another important part of the adjustment process. although there is one exchange rate for canada as a whole ( we all use canadian dollars ), price differentials across the country yield different real provincial exchange rates. this matters. consider the alberta / quebec real exchange rate ( chart 4 ). when higher energy prices stimulate production and investment in alberta, extraction, construction and labour costs there rise. this increases the real alberta exchange rate, making goods and services from the other provinces, including quebec, more competitive. interprovincial trade is boosted, spreading benefits from energy price increases throughout the economy. it is interesting to compare developments in the canadian and european internal exchange rates. for example, since the euro was introduced, spanish competitiveness ( as measured by gdp deflators ) has fallen by about 30 per cent relative to germany. during the same period, the alberta exchange rate moved even more dramatically, rising 40 per cent relative to quebec ( chart 5 ). intra - regional exchange rates in canada have generally been more volatile on average than most internal exchange rates in the euro area ( see tables 1 and 2, appendix ). and yet, the challenges of regaining competitiveness are central to the economic travails of spain. this is because spain is experiencing a balance of payments crisis. in the years following monetary union, spain ran large intra - euro - area current account deficits, funded in part by foreign purchases of real estate and inflows to the spanish banking system. when these dried up,