Financial Times Europe - 02.11.2019 - 03.11.2019

2 November/3 November 2019 ★ FTWeekend 13

there was now a lack of clarity about the

rate at which the central bank is provid-

ing lira funding because the mecha-

nisms the central bank uses have

“dispersed”.

The central bank came under fire ear-

lier this year after the T reportedF that

dollars borrowed by the central bank

through its own swaps facility were

helpingtodisguiseadropinnetreserves

— a fall that many investors believe was

caused by supplying dollars to state

banks that in turn sold them to prop up

thelira.

Since August, use of that facility had

all but evaporated. Now, though, it is

clear that the use of swaps has persisted

throughtheBorsaIstanbul.

The limited data publicly available

about the stock exchange’s swaps mar-

ket makes it more difficult for investors

to estimate their impact on the bank’s

reserves, which have climbed since

theirMarch2019nadir.

“If we can get timely information on

the size of these swaps, the issues about

the real level of reserves can be

addressed easily,” said a London-based

analyst, who asked not to be named.

“Butnowit’snotthateasy.”

Additional reporting by Chelsea Bruce-

Lockhart

Speaking at the central bank’s

regular inflation report event, Mr

Uysal sought to allay some concerns,

saying that using swaps to provide

funding to the market was a “conven-

tional instrument used by central

banks all over the world” and that

the bank was transparent about the

matter.

He also suggested that the rate

applied to this swaps-based funding was

in line with the benchmark one-week

repo rate of 14 per cent but did not give

precisedetails.

An executive at a Turkish investment

bank, who asked not to be named, said

bank’s recent series of benchmark

ratecuts.

Turkey’s shift to using the Borsa

Istanbul swaps market also raises fresh

questions about the true level of the for-

eign currency reserves the central bank

has available todefend the lira nda

underwrite the nation’s large external

debtburden.

“We don’t know the size of these

transactions — we don’t know the inter-

est rate applied on these transactions,”

said Haluk Burumcekci, founder of the

Istanbul-based Burumcekci Research

and Consulting, who challenged Mr

Uysal at Thursday’s meeting on the lack

of transparency. “These are question

marks.”

Economists and analysts had been

puzzled in recent months by a sharp

drop in the volumes of funding being

providedtothemarketthroughthecon-

ventional channel of short-term repur-

chaseagreements.

Mr Uysal confirmed on Thursday the

suspicions that the central bank had

turned to the exchange instead, saying

the total value outstanding on the Borsa

Istanbul swaps market was around

$12bn to $13bn. He did not say what

share of the central bank’s overall fund-

ingthatrepresents.

L AU R A P I T E L —ISTANBUL
A DA M SA M S O N —LONDON

Turkey’s central bank has sparked a
fresh wave of concern among investors
and analysts after saying it is supplying
billions of liras to the financial system
through an opaque market.

After a heated series of questions from
journalists and analysts on Thursday,
central bank governor Murat Uysal
ubliclyacknowledgedforthefirsttimep
thatthecentralbankhadbeenusingthe
Istanbul stock exchange to conduct
swap operations — taking dollars from
Turkish financial companies in
exchange for lira — as a means of
“providingfundingtothebanks”.
Previously, the central bank had
largely done that through the repo
market, where users exchange high-
quality collateral for cash, or through its
own swaps facility, where interest rates
arepubliclyavailable.
The switch to the stock exchange stirs
concerns that the central bank could
effectively be undercutting its own
benchmarkinterestrates.
This is viewed by analysts as a
risky punt considering inflation is
still running at close to double the
5 per cent target and given the central

MEMX,said. “You will see innovation

around technology but not so much

aroundmarketstructure.”

By becoming an exchange, MEMX

would join a small group of stock mar-

kets overseen by the SEC. Official

exchange status means trade orders

must be routed to these exchanges if

theyofferacheaperprice.

In addition to these exchanges, a pro-

liferation of private stock markets

known as “dark pools” have emerged,

drawing trading activity away from

thesepublicmarkets.

MEMX will not charge for connectiv-

ityordatawhenitlaunches,markingan

attempt to push down fees, which have

become a source of contention between

exchanges,customersandtheSEC.

Brokers and investors have argued

that the exchanges hold a near monop-

olyontradinginformationandcanraise

prices at will.NYSE, Nasdaq and Cboe

Global Markets control about two-

thirdsoftradingintheUSstockmarket.

Late last year, the SEC blocked a price

rise for market data for NYSE and Nas-

daq, a rare move, and followed up with

guidance this year calling exchanges to

justifyhigherfees.

R I C H A R D H E N D E R S O N— NEW YORK

Members Exchange, astock market

backed by some of the biggest names

on Wall Street, cleared an important

regulatory hurdle on Thursday, bring-

ing it closer to competing with the likes

of the New York Stock Exchange and

Nasdaq.

MEMX’s backers include trading

groups Virtu Financial, Citadel Securi-

ties, Fidelity Investments and TD

Ameritrade.

Virtu and Citadel alone account for

about 40 per cent of US stock trading,

giving the enterpriseheft in challenging

incumbents and potentiallydriving

downfees.

The Securities and Exchange Com-

mission posted MEMX’sapplication on

its website for public comment, signal-

ling the end of a private consultation

with the regulator that began in January

when the group announced plans to

buildanexchange.

The exchange is aiming to launch in

themiddleofnextyear.

“The focus here is building a simpler

market and a cheaper market,”

Jonathan Kellner, chief executive of

MARKETS & INVESTING

Derivatives

Turkey stirs concern with opaque funding tool

Equities

Virtu-backed bourse MEMX

clears vital regulatory hurdle

FastFT

Our global

team gives you

market-moving

news and views,

24 hours a day

ft.com/fastft

R I C H A R D H E N D E R S O N A N D
J E N N I F E R A B L A N— NEW YORK

As Jared Woodard, aBank of America
investment strategist, steps into the
elevator at work each morning in Mid-
town Manhattan, he already knows
what investors will call to ask a repeated
question.
Why has the US stock market hit
record highs while investor confidence,
reacting to a worsening economic
outlook,hasdeteriorated?
“It’s the most frequently asked ques-
tion we’ve had this year,” Mr Woodard
said. “Investors we speak to are incredi-
bly cautious. They see the market rally
buttheydon’ttrustit.”
US economic growthslowed n thei
third quarter as business investment
continued to weaken, adding to con-
cerns the global economy rests on a
knife-edge.
But the S&P 500 hit arecord high hist
week, capping a 20 per cent rise this
year. If this performance holds until the
end of December, it would mark one
of the best annual returns since the
financialcrisis.
Other market indicators seem more
responsive to the economic picture. The
closely monitored yield curve of US
government debt inverted this year — a
haunting sign that has foreshadowed
recessions over the last five decades —
and a capital squeeze in the market for
overnight bank lending caught the US
Federal Reserve off-guard, forcing it to
injectbillionsofdollarsofliquidity.
Nervous investors have continued to
rush to their favourite retreats, includ-

ing cash and low-risk bonds, sending

yields plummeting. This has swelled the

universe of negatively yielding debt to

$13.5tn. “It’s hard to think of a better

measure of pessimism about global

growth,”MrWoodardsaid.

Set against the gloomy economic

picture, the US stock market’s meteoric

rise is “a fantastic dichotomy”, said Mr

Woodard.

A series of rate cuts by the Fed —

includingaquarterpercentagepointcut

on Wednesday, the third this year — and

cautious optimism that the US and

China will resolve the trade stand-off

havepushedstockshigher.

The Fed’s decision to increase tempo-

rary liquidity injections to $120bn a day

from the current $75bn have also added

further support for stocks, said Nick

Maroutsos, co-head of global bonds at

assetmanagerJanusHenderson.

The stock market has a record of

pricing in today what will happen to the

economyinthenearfuture.

But given the weak growth outlook,

this pattern is being called into ques-

tion, said Alessio de Longis, a senior

portfolio manager on the multi-asset

investing team at fund manager

Invesco. “There is a disconnect between

wherethemarketisgoingandwherethe

economyisheading,”MrdeLongissaid.

On this reading, investors should look

instead to the bond market to under-

standwhystockscontinuetoclimb.

The debt market, highly sensitive to

bad news, has been raising red flags

about slowing domestic and interna-

tional growth as reflected in sliding

yields.

Major central banks responded

quickly to the deteriorating economic

outlook with aggressive monetary pol-

icy action in the form of interest-rate

cutsandbond-buying.

This seems to have reassured inves-

tors. “We hit a bottom in global yields

over the summer and, since then,

they’ve moved up, suggesting the fears

of a global recession have eased,” said

AliciaLevine,chiefmarketstrategistfor

BNYMellonInvestmentManagement.

Yields on Japanese, German and Chi-

nese government debt have inched

higher since the summer as investors

have sold safe bonds in favour of riskier

assets like equities. “Everyone was

really negative and the most crowded

trade was the safety trade,” she said.

Analysts now think this trend is revers-

ing.

Corporate activity is another part of

the puzzle. US corporate profits con-

tracted in the first and second quarters

of the year, sending them into an “earn-

ings recession”, according to FactSet

data. It forecast this trend to continue

intothethirdquarter.

Balancing that, stock buybacks on-c

tinue to provide support to the stock

market. When companies buy their

ownstock,theyreducethetotalamount

of shares on the market, inflating com-

mon metrics like earnings per share,

whichtypicallybooststhestockprice.

Last year, companies in the S&P 500

spent a record $806bn uying backb

shares. Activity this year has slowed

slightly but remains on track to be one

ofthemostactiveonrecord.

In the third quarter alone, companies

areexpectedtospendaround$170bnon

their own stock, according to data

compiled by Howard Silverblatt, senior

index analyst for S&P Dow Jones

Indices.

“Whether it’s good or bad, the market

has gotten used to buybacks,” Mr Silver-

blattsaid.

Apple, which consistently ranks

among the most active companies to

buy its own stock, spent almost $18bn

on buybacks in the third quarter, in line

withpriorquarters.

Persistent stock buybacks combined

with the upbeat tone on trade negotia-

tions between the US and China and his-

torically low rates in the US are likely to

keepstockselevated,saidMrWoodard.

Investors who have sat on the side-

lines will begin to grow anxious that

stockswilljustkeeprising,headded.

“When the market reaches new highs

there is a ‘fear of missing out’ trade,” he

said. Fresh all-time highs would suggest

thatthis“FOMOtrade”isinfullswing.

Buybacks and Fed rate cuts

have provided support despite

bearish signals from economy

‘There is a

disconnect

between

where the

market is

going and

where the

economy is

heading’

Traders at the

New York Stock

Exchange have

seen the S&P

500 hit records

this week— Justin

Lane/epa-EFE/Shutterstock

Equities. rading dichotomyT

Meteoric rise of US stocks

creates puzzle for investors

J E N N I F E R A B L A N— NEW YORK

US short seller Jim Chanos has enjoyed

one of the most profitable months in his

firm’s history, thanks to bets against a

food delivery company that warned

Uber was eating into its market and a

California utility partly blamed for the

state’swildfires.

Mr Chanos’ Kynikos Capital Partners

posted returns of 5.3 per cent in October

for a year-to-date gain of 20.4 per cent,

according to two investors in the $1.3bn

fund.

“October has been one of our best

months, both absolutely and relatively,

in a long time,” Mr Chanos old thet

FinancialTimes.

Shares in the food delivery company

Grubhub fell 43 per cent in a single day

this week after a gloomy profit forecast

it blamed on “promiscuous” diners

pickingother services uch as Ubers

Eats,DoorDashandPostmates.

Meanwhile, the bankrupt utility

Pacific Gas and Electric, whose shares

still trade, fell 29 per cent and 30 per

cent on consecutive days as itshut off

power o nearly 3m people to preventt

fallingwiresfromignitingfurtherfires.

Mr Chanos argued that there

was “almost no margin” in the food

delivery business when he hinted about

his Grubhub position in a CNBCinter-

view nSeptember.i

As for PG&E, he predicted its equity

would be wiped out by claims from last

year’sfatalwildfires.

“We also question whether PG&E will

beabletoexitbankruptcy-courtprotec-

tionintheforeseeablefuture,”hesaidin

amemotoinvestors.

The short seller’smost famous bet

was against energy company Enron

beforeitscollapsein2001.

He took his position against Grubhub

in the middle of this year at an average

price of $70 and PG&E in February at an

average price of $17, according to two

peoplefamiliarwiththematter.Thetwo

shares were $34 and $6, respectively, as

Octoberended.

Both stocks are popular shorts. Grub-

hub short sellers ollectively madec

paper gains of $521m on Tuesday alone,

according to Ihor Dusaniwsky, manag-

ing director of predictive analytics at S

Partners, a research firm. PG&E short

sellers are up $134.2m in mark-to-mar-

ket profits in October, bringing their

year-to-dateprofitupto$606.1m.

Mr Chanos is still short both Grubhub

and PG&E and bearish on Edison Inter-

national, another California utility,

whose shares were sharply lower in

October.

Mr Chanos has been a lightning rod

for criticism of short selling because of

his outspoken bets againstcompanies

such as Tesla, the electric car-

maker.Tesla shares, which were up 30

per cent in October, were a drag on

Kynikosperformanceinthemonth.

Equities

Short seller

Chanos enjoys

windfall in

October

‘We question whether

PG&E will be able to exit

bankruptcy protection in

the foreseeable future’

Turkish central bank winds

down its own swap facility

Bank has shifted activity to Borsa

Istanbul (cumulative borrowing, bn)

Sources: Turkish central bank; FT analysis









Mar  Oct

US stocks hit record high

S&P  index

Source: Bloomberg

















Jan Oct

First Federal Reserve

rate cut of the year

Second cut

Third cut



NOVEMBER 2 2019 Section:Markets Time: 11/20191/ - 18:40 User:stephen.smith Page Name:MARKETS1, Part,Page,Edition:EUR , 13, 1