Financial Times Europe - 10.10.2019

Thursday10 October 2019 ★ FINANCIAL TIMES 19

MARKETS & INVESTING

TO M M Y ST U B B I N GTO N— LONDON
P E T E R W I S E— LISBON

The list of countries being paid to
borrow by investors has an unlikely
new member —Greece.

In a rally that has swept through all cor-
ners of the eurozone debt markets, and
that also shoved Portuguese borrowing
costs down to record lows yesterday, the
Greek government sold new three-
month debt at a negative yield for the
first time, meaning buyers were pre-
pared to lock in a loss on their invest-
ment.
The milestone caps Greece’s extraor-
dinary rehabilitation in the eyes of
investors after it received multiple bail-
outsduringtheregion’sdebtcrisis.
Athens raised €487.5m from its auc-
tion of 13-week bills at a yield of minus
0.02 per cent, compared with positive
0.10 per cent at the previous sale in
August. Bills are a form of short-term
government debt generally purchased
bybankslookingforsomewheretopark
theircash.
The decline partly reflects the fact
that the European Central Bank cut
interest rates by 0.1 percentage point to

minus0.5percentinSeptember.Butthe

milestone—alongwithTuesday’ssaleof

€1.5bn of 10-year bonds at a record low

yield of 1.5 per cent — is also a sign that

investors have grown more confident

about the prospects for the Greek econ-

omy, which is forecast to grow at 2.8 per

centnextyear.

With the ECB also announcing the

resumption of its bond-buying stimulus

programme last month, markets are

awash with cash drawn to the relatively

highyieldthatGreekdebtoffers.

“This is a function of very low interest

rates and QE, which begets more risk-

seeking behaviour by investors,” said

Peter Schaffrik, global macro strategist

atRBCCapitalMarkets.

Thanks to ECB stimulus efforts and

gloom over global economic prospects,

about two-thirds of government debt in

the euro area trades at a negative yield,

includingallGermanbonds.

Other former crisis spots such as Italy

and Spain have already joined the nega-

tive-yield club with Madrid being paid

to borrow to maturities of up to nearly a

decade.

Debt sales by Italy and Portugal yes-

terday further underlined the hunger

for eurozone sovereign bonds, which is

fuelled by bets that interest rate will

stay at rock-bottom levels for years to

come.

Prices in eurozone money markets

indicatethatinvestorsexpecttheECBto

hold interest rates below zero for the

nextsevenyears.

It was Portugal’s first bond auction

since the ruling centre-left Socialists

won a general election on Sunday,

increasing their share of the vote but

fallingshortofanabsolutemajority.

Fixed income

Greece hits milestone on borrowing as

it joins club of negative-yielding issuers

P H I L I P G E O R G I A D I S— LONDON

J O S E P H C OT T E R I L L— JOHANNESBURG

TheAfrican Export-Import Bank,

which provides trade finance across

the continent, is weighing a flotation in

London that would provide a boost to a

UK stock market running dryon new

listings.

The Cairo-headquartered group, also

known as Afreximbank, saidyesterday

that itwas considering listing global

depositaryreceiptsontheLondonStock

Exchange o fund its expanding opera-t

tions and take advantage of the growing

tradeacrossAfrica.

While the Mauritius-listed bank is set

to make a decision later this year, a per-

son close to the process said London

remains a compelling destination to

raise capital despite the current uncer-

tainty regarding Britain’s departure

fromtheEU.

The person described the potential

listing as “Brexit-proof” as the bank

operates in dollars and conducts its

businessinternationally.

Such a deal would provide some relief

for the London bourse, which is suffer-

ing fromdrab volumes and delistings. It

remainsEurope’s dominant hub for

equity financing but more companies

have left the LSE’s main market this

yearthanhavejoined.

The third quarter was the bourse’s

quietest in a decade ith just four com-w

panieslaunchinginitialpublicofferings,

accordingto Yresearch.E

Kazakh fintech groupKaspi.kz ost-p

poned its London flotation his week,t

which would have been the biggest IPO

by a central Asian company since the

financial crisis. The company blamed

“unfavourable and uncertain market

conditions”.

Afreximbank, which has about $15bn

of assets, was established in 1993 by a

consortiumofAfricangovernmentsand

privateandinstitutionalinvestors.

It has four classes of shares including

a class A held by African governments

and class D shares that private investors

can trade on the Mauritius stock

exchange. The London GDRs will repre-

senttheclassDstock.

In recent years, the bank has had abig

role as alender o Zimbabwe as thet

southern African nation has undergone

dire shortages since the fall of Robert

Mugabe. Afreximbank facilities have

backed Zimbabwe’s attempts to prop up

aflagginglocalcurrency.

The group would use proceeds from

an IPO to expand its lending activities

after a pan-African trade deal, the

Africa Continental Free Trade Area,

officiallycameintoforce hisyear.t

The trade agreement’s supporters say

it offers the possibility of boosting

growth n a bloc of nations with a com-i

bined GDP of more than $3tn. But it

is several years away from implementa-

tion.

JPMorgan and HSBC are to act as joint

bookrunners on the potential listing,

which would see Afreximbank ist glo-l

baldepositaryreceiptsonthe SE.L

The group did not provide details on

the value of any listing. It has a book

valueof$2.7bn,accordingtoaninvestor

updateissuedlastmonth.

See Lex

Equities

African trade finance group weighs

‘Brexit-proof ’ listing in London

The third quarter was the

LSE’s quietest in a decade,

with just four companies

launching IPOs

The Greek economy is forecast to

grow at 2.8 per cent next year

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J O E R E N N I S O N A N D C O L BY S M I T H

NEW YORK

The US Federal Reserve is facing a fresh

communications challenge after some

analysts and investors reacted with

bemusement to Jay Powell’s insistence

that a resumption of balance sheet

expansiondid not amount to a return to

quantitativeeasing.

On Tuesday afternoon, the Fed chair

said the central bank would begin a

fresh round of Treasury purchases in

order to address recent turbulence in

short-termlendingmarkets.

He added that the move was“in no

way” he same as the post-financial cri-t

sis policy of bond-buying, known as QE,

which was aimed at lowering interest

ratesandeasingfinancialconditions.

Instead, Mr Powell stressed that the

latest round of asset purchases was sup-

posed to ensure there is enough cash in

the financial system to prevent further

turmoilinshort-termlendingmarkets.

Suchpurchasesfollowabriefshortage

of money flowing through the system

last month that pushed the fed funds

rate—theprimaryinterestratetargeted

by the central bank — outside its target

range.

But analysts and investors noted that

the effects of the policies could be simi-

lar,iftheyweretoboostbondpricesand

send yields lower. “Powell was very

clear to say it’s not QE but you are add-

ingbalancesheetandreducingrates—it

certainly smells like QE to me,” said

Andrew Brenner, head of international

fixed income at NatAlliance Securities

in New York. “You have to call it like it

is.”

Under the leadership of Mr Powell,

the central bank has sometimes strug-

gledtoconveyitsmessagetoinvestors.

In his remarks at a conference in Den-

veronTuesday,theFedchairreferredto

the purchase of short-dated Treasury

“bills”. In theory, buying bills rather

than bonds should limit any impact on

longerdatedTreasuryyields.

That should distinguish the effects of

this latest round of purchases from the

QE programme begun in 2008, which

was specifically designed to lower

longerterminterestrates.

But the move is complicated by

the resumption of QE in Europe from

November, said Paul Ashworth, chief

USeconomistatCapitalEconomics.

“Powell pleaded... that this balance

sheet management should ‘in no way be

confused with’ large-scale asset pur-

chases,” he said. “But it is hard to com-

municatethateffectivelywhentheFed’s

organic balance sheet growth will be

half the size of the ECB’s newly unveiled

QE.”

The US central bankwill make its

next statement on monetary policy at

theendofthismonth.Fornow,thebond

market’sreactiontothespeechhasbeen

muted.

Fixed income

Fed’s balance

sheet move

creates puzzle

over QE term

‘Powell was very clear to

say it’s not QE but you

are adding balance sheet

E VA SZ A L AY— LONDON and reducing rates’
C O L BY S M I T H— NEW YORK

The US dollar has long towered over
global markets and finance. But cracks
arestartingtoappearintheedifice.
The greenback’s pre-eminent role in
official funds and international trade is
formidable and unlikely to fade quickly.
But the latest data from the IMF on cen-
tral banks’ reserves show a subtle shift
away from the dollar that analysts say
could signal a rethink on the political
riskembeddedintoUSassets.
“Centralbanks[are]chippingawayat
the dollar’s ‘exorbitant privilege’,” said
Alan Ruskin, chief international strate-
gistatDeutscheBankinNewYork.“Pol-
itics are starting to infringe in ways that
have the potential to challenge the dol-
lar’sdominance.”
In last month’s quarterly report on
central banks’ reserves, the IMF said
that the share of the global total denom-
inated in dollars was just short of 62 per
cent in the second quarter of this year,
down 0.76 percentage points from the
same period a year earlier. Euro-
denominated reserves account for 20
percent.
While the dip is small, the apparent
resilience is deceptive. As Mr Ruskin
pointed out, the dollar was, during that
quarter,thehighestyieldingcurrencyin
the developed world. In theory, that
should have lured in investment at a
fasterpacethanothercurrencies.
Instead, central bank reserve manag-
ers — a powerful force in global markets
— accumulated 3.5 per cent more dol-

lars over the year, far behind gains of 17

percentfortherenminbiandeven8per

cent for sterling, despite the pound’s

Brexit-relatedtroubles.Thedollar’sfall-

ing share of reserves represents an

“official sector vote against US ‘excep-

tionalism’”,saidMrRuskin.

In his view, the data should give pause

to US policymakerscontemplating laws

to tax foreign purchases of US assets,

further sanctions based on the interna-

tional use of the dollar and plans to

restrict access to US capital markets. All

are actions that couldweaken the dol-

lar’sinfluence.

Mark Carney,Bank of England gover-

nor,warned policymakers in August

thataswellasbeingthetopcurrencyfor

invoicing and settling international

trade, two-thirds of global securities

issuance and official currency reserves

are denominated in the dollar. This

makes economic developments in the

US the river for monetary policy else-d

where,especially mergingmarkets.e

In the long run, central banks should

move to a “multipolar” economic sys-

tem, Mr Carney said, adding that “the

renminbihasalongwaytogobeforeitis

ready to assume the mantle [but] the

initialbuildingblocksarethere”.

Goldman Sachs analysts said ollard

reserves slipped nearly4 percentage

points n 2017i -18. At the same time,

reserve managers have dded to theira

renminbi and Japanese yen holdings,

especially in countries that have had a

fractious elationshipwiththeUS.r

“So far, these flows have been fairly

concentrated,” said Mike Cahill, an

economistatGoldmanSachsinLondon.

“Russia accounted for about 70 per cent

of new renminbi reserves in 2018, and

Brazil and Chile account for about 40

per cent of renminbi reserve accumula-

tionin2019.”

The US has increasingly used the dol-

lar’s dominance to further its foreign

and trade policies. In response, ideas

such as invoicing some of the world’s oil

trade in the euro aregaining traction.

Claudio Borio, head of the monetary

and economic department at the Bank

for International Settlements, sug-

gested in aspeech his year that movingt

oil trading and settlement into the euro

and away from dollars “could limit the

reach of US foreign policy insofar as it

leveragesdollarpayments”.

Russia has also been making focused

efforts over the past five years to move

away from the greenback as the cur-

rency for trade and payments, and to

reduce the impact of dollar strength on

itseconomy.

Dmitry Dolgin, an economist at ING

Bank in Moscow, said there were “clear

signs”inthefirstquarterofhighereuro-

denominatedexportsfromRussiatothe

EU and China and rouble-denominated

exportstoIndia.

But central banks face a tough choice.

Neither the euro nor the renminbi have

the deep liquidity that dollar markets

offer. Yields on eurozone government

bondsaredeeplynegativewhiletheren-

minbi remains tightly controlled by the

Chinesegovernment.

Some reserve managers have turned

to gold. A report for the World Gold

Council and think-tank OMFIF in Sep-

tember highlighted that central banks

have beenbuying the yellow metal ta

levels last seen during the Bretton

Woods era, when exchange rates were

peggedtogold.

China, Russia and India were the larg-

est buyers of gold alongside Turkey and

Kazakhstan. China alone has added

almost 100 tonnes of gold to its reserves

overthepast10months.

“When you look at it on a one- to two-

year outlook, it is highly unlikely that

any asset could usurp the dollar’s domi-

nance,” Mr Ruskin said. “But when

you’re talking about a decade or two,

you have to take other considerations

intoaccount.”

Political risks prompt rethink

of greenback’s weighting in

foreign exchange reserves

‘Russia

accounted

for about

70 per cent

of new

renminbi

reserves

in 2018’

The dollar’s

falling share of

central bank

reserves is a

vote against ‘US

exceptionalism’,

according to

analysts

Paul Yeung/Bloomberg

Currencies. olicy shiftP

Central banks start to edge

away from US dollar

The dollar remains king of the yield even as Fed cuts

Percentage return from interest rates, year to date ()

Source: Bloomberg

US dollar

Canadian dollar

New Zealand dollar

Australian dollar

Norwegian krone

British pound

Swedish krona

Japanese yen

Euro

Danish krone

Swiss franc

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OCTOBER 10 2019 Section:Markets Time: 10/20199/ - 18:42 User:stephen.smith Page Name:MARKETS1, Part,Page,Edition:EUR , 19, 1