2 6 A W e d n e s d a y 1 8 S e p t e m b e r 2 0 1 9

John Plender

Markets Insight

GlassmakerCorningdropped after
warning that its optical communications
and display divisions were
underperforming. Both enterprise
customers and “several” big carriers had
cut investment in fibre-optic cables, while
macro uncertainties had led LCD panel
manufacturers to reduce production
volumes, Corning said.
Kraft Heinzslipped after Brazil’s 3G
Capital, its second-largest shareholder,
sold more than 25m shares.
Barnes & Noble Educationwas weak
after being cut from Sidoti & Co’s “buy”
list. A surge in digital spending suggested
demand for physical textbooks during the
autumn rush would be below
expectations, the broker said.
Insurance websiteEverQuotefell after
Merrill Lynch switched from positive to
negative.
A 500 per cent year-to-date gain was
ignoring lumpy trends since EverQuote’s
flotation last year, it said.
RetailerDestination Maternity
declined after missing earnings forecasts,
withdrawing full-year guidance and
saying it was open to a sale or merger.
Funko, the pop culture toymaker, slid in
response to share sales by its chief
executive and its main backer.
Bryce Elder

Wall Street Eurozone London

Zalandowas the Stoxx 600’s sharpest

faller after Swedish investment group

Kinnevik sold more than a quarter of its

stake. Kinnevik made €558m by selling

the 5.2 per cent holding in the fashion

retail website, with the placing completed

at about a 6 per cent discount to

Monday’s closing price.

Bank of Ireland,AIB andBankialed

a retreat for Europe’s lenders as a

squeeze in the US short-term funding

market stoked worries about their

financing costs.

Husqvarnaof Sweden drifted lower

after giving an unexpectedly cautious

message on margins at a capital markets

day. The gardening equipment maker

updated long-term sales growth targets

but emphasised that investment into

robot mowers and battery-driven tools

would remain a drag on profitability.

Cable makerPrysmianfaded on the

back of a profit warning from US peer

Corning, a rival optical fibre maker.

Analysts saw few implications for

Prysmian as the US contributes just a

fifth of the Italian group’s telecoms

revenue. And while Corning was likely to

be suffering due to AT&T phasing down

its infrastructure spending, Prysmian’s US

business was more reliant on orders from

Verizon, said Credit Suisse.Bryce Elder

Wm Morrisonwas weakest among the UK

supermarkets after industry sales data

for August suggested it had been the

laggard among the big four.J Sainsbury

weakened in spite of a UBS upgrade to

“buy”, which predicted a better Christmas

based on consumer perception of the

brand recovering to historic levels.

InterContinental Hotels andPPHE,the

Park Plaza Hotels owner, edged higher

after Jefferies started coverage with

“buy” advice. While the lodging cycle

looked to be on its last legs, revenue per

available room was unlikely to turn

negative without a sharp deceleration in

GDP growth, the broker said. It advised

clients to buy the asset-light hotel

management and franchise groups while

avoiding those that were more exposed

to slowing room rate growth, such as

Whitbread.

Burberrygained on a positive initial

response to the fashion label’s spring-

summer runway show.

Sirius Mineralsmore than halved on

news that it had pulled a $500m junk

bond sale that underpinned the financing

for its Yorkshire fertiliser mine project.

Gulf Keystone Petroleum, the

Kurdistan explorer, outperformed a

marketwide reversal for oil companies on

“buy” advice from Macquarie.Bryce Elder

3 Defensive stocks outperform as
markets turn tentative
3 Italy’s bonds sell off after ex-PM splits
from Democratic party
3 Wall Street muted ahead of Fed rate
announcement

Stocks struggled to find direction as
investors awaited the US Federal
Reserve’s rate announcement today.
Wall Street held steady before today’s
central bank meeting where policymakers
are expected to cut interest rates by 25
basis points.
The S&P 500 and Nasdaq Composite
indices were flat at midday in New York
while the Dow Jones Industrial Average
edged 0.1 per cent lower.
In Europe the market mood was also
tentative. Frankfurt’s Xetra’s closed 0.1
per cent down following mixed readings
from a German economic survey.
The Zew survey of financial market
experts found that sentiment about the
outlook for the eurozone’s biggest
economy improved in September,
registering minus 22.5, up from the eight-
year low of minus 44.1 in August.
But the results were still much more
gloomy than the long-term average. It
also found that sentiment about the
economic situation in Germany had
worsened by 6.4 points to minus 19.9 —
its lowest level for nine years.
In Italy, government bonds sold off and
its FTSE MIB index fell 0.8 per cent after

former prime minister Matteo Renzi split

from the centre-left Democratic party to

create a centrist political movement, a

move that risked further instability in

Europe’s fourth-largest economy.

The yield on Italy’s 10-year bonds rose

more than 7bp to 0.93 per cent.

Defensive stocks, prized for their stable

earnings, proved popular amid the

uncertainty.

Europe’s utility and healthcare sectors

advanced 1.1 per cent and 0.8 per cent

respectively, outpacing the wider Stoxx

Europe 600 index that ended the day flat.

Brent crude, the international oil

benchmark, retreated 5 per cent, giving

up some of Monday’s rally, after a report

that Saudi Arabia’s production could

return to normal sooner than forecast.

Asian equities were mostly lower. Hong

Kong’s Hang Seng dropped 1.2 per cent,

while China’s CSI 300 index of Shanghai-

and Shenzhen-listed stocks fell 1.7 per

cent after the People’s Bank of China left

its one-year medium-term lending facility

rate unchanged at 3.3 per cent. Analysts

had been expecting more signs of easing

from the central bank.Ray Douglas

What you need to know

Investors seek refuge in defensive stocks

Indices rebased

Source: Bloomberg







Fri Mon Tue

Stoxx Europe  Utilities Stoxx Europe 

Stoxx Europe  Health Care

The day in the markets

Markets update

US Eurozone Japan UK China Brazil
Stocks S&P 500 Eurofirst 300 Nikkei 225 FTSE100 Shanghai Comp Bovespa
Level 2998.76 1529.21 22001.32 7320.40 2978.12 104181.62
% change on day 0.03 0.00 0.06 -0.01 -1.70 0.48
Currency $ index (DXY) $ per € Yen per $ $ per £ Rmb per $ Real per $
Level 98.591 1.105 108.205 1.248 7.094 4.099
% change on day -0.019 0.455 0.176 0.483 0.419 0.485
Govt. bonds 10-year Treasury 10-year Bund 10-year JGB 10-year Gilt 10-year bond 10-year bond
Yield 1.800 -0.477 -0.156 0.617 3.082 7.289
Basis point change on day -3.920 0.500 0.430 0.200 -0.700 -4.900
World index, CommodsFTSE All-World Oil - Brent Oil - WTI Gold Silver Metals (LMEX)
Level 346.72 66.11 60.30 1497.20 17.84 2838.60
% change on day 0.01 -2.52 -2.05 -0.39 -1.71 -1.22
Yesterday's close apart from: Currencies = 16:00 GMT; S&P, Bovespa, All World, Oil = 17:00 GMT; Gold, Silver = London pm fix. Bond data supplied by Tullett Prebon.

Main equity markets

S&P 500 index Eurofirst 300 index FTSE 100 index

||||||| |||||||| |||||

Jul 2019 Sep

2800

2880

2960

3040

||||||||||||||||||||

Jul 2019 Sep

1400

1440

1480

1520

1560

||||| |||||||| |||||||

Jul 2019 Sep

7040

7360

7680

8000

Biggest movers
% US Eurozone UK

Ups

Ulta Beauty 3.67

Hershey (the) 3.47

Cme 3.38

Teleflex 3.33

Ball 3.32

Edenred 3.18

Novo Nordisk 3.08

Reed Elsevier 2.80

Red Ele. 2.72

Jeronimo Martins 2.55

Aveva 3.19
Relx 2.89
Rentokil Initial 2.83
Sage 2.60
Halma 2.23
%

Downs

Nordstrom -8.66

Corning -8.19

Apache -7.35

Marathon Oil -5.86

Halliburton -5.34

Prices taken at 17:00 GMT

Seadrill -10.48

Saipem -4.59

Casino Guichard -4.46

B. Sabadell -4.19

Caixabank -3.86

Based on the constituents of the FTSE Eurofirst 300 Eurozone

Tui Ag -4.62

Evraz -3.88

Mondi -3.04

Smurfit Kappa -2.99

Barclays -2.79

All data provided by Morningstar unless otherwise noted.

I

t is a scenario that until recently

would have struck most observers

as downright implausible: a finan-

cial cycle in which global debt piles

up inexorably while nominal inter-

estratescollapse.

Yet here we are, in seeming equilib-

rium where $14tn of debt has negative

yields, with investors paying for the

privilege of lending to governments.

The question is how stable and durable

that equilibrium will prove, especially if

weareinabubbleforbondprices.

There is no shortage of warning signs,

not the least being the substantial buy-

ing by investors who are unconcerned

about fundamentals. Chief among them

are the central banks, for whom the

price of the bonds they have bought

since the financial crisis is not a primary

consideration. Also insensitive to price

are fast-growing passive bond funds and

those pension funds that match their

investmentstrategiestotheirliabilities.

Then there are investors who buy

negative-yielding bonds on the “greater

fool” theory, with central banks cast as

thefoolswhowilldelivercapitalgainsto

these investors through further easing.

They are more sensitive to price than to

income,asaremomentuminvestors.

Yet the most striking feature of recent

bond market flows is how much foreign

money has been chasing negative yield-

ing IOUs. Official data aggregated by

JPMorgan show that foreign investors

bought nearly $210bn of eurozone

bonds and $70bn of Japanese bonds in

the first half of the year. This compares

with a $550bn outflow from March

2015, when the European Central Bank

began its “quantitative easing” pur-

chases,totheendof2018.

The figures for Germany, at the heart

of the negative rate phenomenon, are

particularly striking. After cumulative

outflows of nearly $360bn over the

same period, there were inflows of more

than $65bn in the first half of this year.

These are extraordinarily large shifts

and seemingly perverse when the pool

of eurozone bonds sporting negative

rateswasexpandingrapidly.

Part of the explanation is a quirk in

the workings of foreign exchange

hedges. These are based on the relative

levels of short-term interest rates,

which are much higher in the US, which

has a 10-year government bond yield of

1.8 per cent, than Germany, where the

same maturity of government debt

trades at minus 0.5 per cent, and Japan

at minus 0.2 per cent. Dollar-based

investors are in effect paid to hedge

their euro or yen exposure back into

dollars. This counterintuitive carry

trading arithmetic has been a very pow-

erful driver of cross-border capital

flows. All part of the fun, it seems, of a

bondmarketbubble.

An equilibrium in which debt goes on

risingwhileinterestratesfallcannotlast

forever. What, then, could unhinge it

andcauseyieldstorise?Oneeventuality

is that central banks reach a negative

interest rate floor, which must exist as

long as there is physical cash in the sys-

tem. That is the point at which deposi-

tors decline to pay fees for lending to

banksandwithdrawtheirfunds.

An additional constraint on pushing

rates further into negative territory is

the damage inflicted on banks that are

having to pay to keep loans and securi-

ties on their balance sheets. Penalising

themforextendingcredittosustaineco-

nomic growth cannot be good, as

reflected in the depressed price of Euro-

pean bank shares. These also tell of

growing scepticism about the ability of

monetary policy to keep the global eco-

nomic show on the road. A consensus is

emerging — even to a degree in fiscally

orthodox Germany — that fiscal policy

willhavetodomoreofthework.

Ultra-low rates are substantially due

to excess savings in northern Europe

and Asia. Expansionary budgets would

imply reduced saving by governments,

therebyerodingglobalimbalances.

Other factors that point to a return to

higher inflation and thus higher rates

include US president Donald Trump’s

tradewar,whichisraisingcostsasglobal

supplychainsarereinedback.

There is the possibility, too, that

demographic pressure involving

shrinking workforces in the developed

world and in China will lead to renewed

wage inflation. This, admittedly, has not

happened in Japan where ageing is

already advanced, but it is possible the

Japaneseworkforceisuniquelydocile.

Investment, which has been weak in

advanced economies, could pick up sig-

nificantly as old industries are dis-

rupted by new ones and forced to renew

physical capital — the motor industry is

one among many potential examples.

Businesswillalsohavetomakethehuge

investment necessary for the transition

alow-carboneconomy.

That said, the deflationary forces in

the world remain far from negligible. It

would be a bold person who would hap-

pily predict whether rising yields will

comebeforeorafterthenextrecession.

[email protected]

High-debt, low-rate

bonds equilibrium

cannot last forever

Ultra-low rates are

substantially due to

excess savings in northern

Europe and Asia

SEPTEMBER 18 2019 Section:Markets Time: 17/9/2019 - 19:05 User: jeremy.wright Page Name: MARKETS2, Part,Page,Edition: LON, 30 , 1