Financial Times Europe - 06.09.2019

Friday6 September 2019 ★ FINANCIAL TIMES 19

MARKETS & INVESTING

C O L BY S M I T H— NEW YORK

Some of Argentina’s largest interna-
tional creditors, includingT Rowe
Price,Eaton Vance nda GMO, held
informal discussions this week onhow
to respond to President Mauricio
Macri’s plan to delay payment on
$101bn of debts — concluding that
negotiations with a lame duck govern-
mentwouldbefutile.

Mr Macriis seeking a “voluntary repro-
filing” of $50bn of longer term debt,
held mostly by foreign investors, and
$44bn of loans already disbursed by the
IMF from its record-breaking $57bn
bailout agreed just last year. The gov-
ernment has already postponed $7bn of
paymentsonshort-termlocaldebt.
The current crisis was triggered by a
primary vote hat indicated Mr Macri ist
likelytolosetheelectioninOctober.
Bondholders convened a call on Tues-
day and discussedstrategies, reaching a
consensus that any debt deal is likely to
be defunct unless it gets buy-in from
new presidential frontrunner Alberto
Fernández, according to a participant
onthecall.
In addition, the Macri government

has not yet come up with any kind of

restructuring proposal. The creditors

determined that it made little sense to

initiate negotiations yet, nor to band

togetherinaformalisedcommitteewith

legalrepresentation.

Instead, during what one investor

called a “wait-and-see” mode,bond-

holders are focusing on establishing

channels of communication with the

Fernández team and engaging directly

with the IMF — all the while sharing

notesamongthemselves.

“Wehavenoclarity,”saidonecreditor

who spoke under the condition of ano-

nymity. “Taking a stance at this point is

stupid.”

While the bondholders are not ready

to organise, they stressed that Mr

Macri’splan to deal with the country’s

short-term local debt was unlikely to

providemuchmorethanfleetingrelief.

“Pushing the bonds out six months

doesn’treallysolveanything,”saidMike

Conelius, a portfolio manager at T Rowe

Price who was on Tuesday’s call, adding

that the ideal situation would be one in

which the Macri and Fernández teams

threw their support behind a more

sweepingplan.“Whathasbeencontem-

plated so far locally is very short-term

and it needs to be much more compre-

hensive.”

GMO and Eaton Vance declined to

comment.MrFernándezhasbeentight-

lipped on his economic plan and what

relationshipheseekswiththeIMF.

Given the country is not yet in default

on its external debts and there remains

a political vacuum ahead of the election

in October, the bondholders under-

scored it may be some time before real

progresscanbemade.

Fixed income

Argentina’s creditors adopt wait-and-see

stance on Macri debt repayment delay

M AT T H E W R O C C O— NEW YORK

P H I L I P STA F F O R D— LONDON

US markets regulators have handed

out their first penalty to a systemically

important clearing house, agreeing a

$20m settlement with the Options

Clearing Corp for failing to meet

tougher standards introduced after the

financialcrisis.

Clearing houses have become vital com-

ponentsoftheglobalfinancialsystemin

the past decade. They stand between

two parties in a deal to cushion the

impactofeithersidedefaulting.

The Securities and Exchange Com-

mission and the Commodity Futures

Trading Commission, which monitors

derivatives markets, charged OCC with

failing to establish and enforce proce-

durestotestriskstobothcustomersand

theclearinghouseoverseveralyears.

Chicago-based OCC, which did not

admit or deny the regulators’ findings,

will undertake remedial efforts and pay

a combined $20m in penalties to settle

the charges, a joint statement late on

Wednesdaysaid.

OCC is the sole US clearing house for

exchange-traded options on stocks such

as Apple and benchmarks like the Vix

volatility index. It processes around

20m contracts a day and in 2012 was

designatedoneofeightfinancialmarket

utilities whose failure could threaten

thestabilityoftheUSfinancialsystem.

“As this case shows, principles-based

regulationdoesnotmeanlaxoversight,”

said Heath Tarbert, chairman of the

CFTC. “While clearing agencies have

some discretion in crafting their risk

management policies and procedures,

those policies and procedures must be

reasonable and take into consideration

relevantrisks.”

The SEC and CFTC alleged that OCC

“failed to establish and enforce policies

and procedures involving financial risk

management, operational require-

ments, and information-systems secu-

rity”.

They also alleged that OCC changed

risk management policies without

obtainingSECapproval.

John Davidson, chief executive of

OCC, said: “We take our responsibility

to promote the stability and integrity of

markets seriously, and we are commit-

ted to operating as a resilient clearing

house and maintaining the highest

standards of regulatory compliance

throughoutourorganisation.”

He said OCC had worked on remedia-

tion plans and had already replaced

most of its most senior executives,

including its chief executive, chief oper-

ating officer, head of financial risk man-

agementandchiefinformationofficer.

Regulators, users and some share-

holders have been unhappy with OCC’s

riskmodelsforseveralyears.

OCC’s model for measuringimplied

volatility ntheVix—andtheamountofi

margin needed to protect against it —

was tested by the Vix’s sudden spike in

February2018.

One of its members faced a tenfold

overnight increase in margin demands,

although the OCC did not actually

require the member to post the full

amount. Mr Davidson later admitted

thegroup’smodelhad“overreacted”.

Derivatives

Options Clearing Corp handed $20m

penalty by regulators for risk failures

‘As this case shows,

principles-based

regulation does not

mean lax oversight’

President Mauricio Macri with the

IMF’s Christine Lagarde last year

FastFT

Our global

team gives you

market-moving

news and views,

24 hours a day

ft.com/fastft

R O B I N W I G G L E S WO RT H

Bank of America’sBrian Moynihan
tempted fate last month by arguing that
the latest bout of angst over an
economicdownturnwasoverblown.
Echoing Franklin Roosevelt’sinaugu-
ral 1933 address — when the president
sketchedouthisplanstochartawayout
of the Great Depression — Mr Moynihan
said: “We have nothing to fear about a
recession right now, except for the fear
ofrecession.”
But BofA’s chief executive highlighted
apotentialpitfall.Investorsarewonder-
ing if worries over a downturn — in
PresidentRoosevelt’swords,“nameless,
unreasoning, unjustified terror which
paralyses needed efforts to convert
retreatintoadvance”—couldturnintoa
self-fulfillingprophecy.
Neil Williams, a senior economic
adviser at Hermes Investment Manage-
ment in London, said: “If there are
concerns about a recession and corpo-
rate investment is restrained as
a result, the road can in fact lead to a
recession.”
There were hints of this in the
latest reading of the US Institute for
Supply Management’s manufacturing
index, which delivered a bleak
update for August this week, including
the lowest figure fornew exports inces
April2009.
There is an undercurrent of fear and“
alarm regarding the trade wars and a
potential recession,” one survey
respondentsaid.
The Fed’s Beige Book — anecdotal
data gathered by the central bank’s

regional arms — also indicated that

businessesarebecomingmorewary.

The word “uncertain” made 33

appearances, up from the year’s prior

high of 23 in July, said Nicholas Colas of

DataTrekResearch.

Recession fears are apparent, too, in

bond markets, which have seen a fero-

cious rally over the summer, driving

yieldslower.

About $16tn of bonds, or one-third of

the global debt market, trades withneg-

ativeyields ndtheUS“a yieldcurve”has

inverted, which is something that has

preceded every post-second world war

recession.

However,someanalystsandinvestors

argued that plummeting yields were

driven more by technical factors, defla-

tionaryforcesandexpectationsofeasier

monetary policy, rather than real fears

ofadownturn.

They pointed out that while global

manufacturingwas in a funk, services

and consumer spending — much bigger

drivers of most advanced countries —

were in decent shape. Thatwas particu-

larly true in the US, the world’s biggest

economy.

Stock markets, a little short of all-

time highs, are not signalling much dis-

tress either. Interest rate futures indi-

cated that the Fed would make repeated

cuts but not to the near-zero level that

mightimplyarecession.

Nonetheless, there are hints that

recessionary signs might spread from

financialmarketsintotherealeconomy,

which could — if it spurs consumers and

companies to rein in spending — be

enoughtotiptheapplecart.

Google’s tool for analysing internet

search trends showed that worldwide

queries about “recession” have spiked

to the highest level since early 2009. In

the US, they have soared to the highest

sinceOctober2008.

The recent yield curve inversion —

when the 10-year Treasury yield dipped

below the two-year Treasury yield in

mid-August, prompting President Don-

ald Trump totweet bout the “CRAZYa

INVERTED YIELD CURVE!” — appears

tohavebeenatrigger.

Google searches for “yield curve” last

month jumped to the highest since at

least2004.

More rigorous sentiment measures

were less clear. The US Conference

Board and the University of Michigan’s

consumer confidence surveys have

divergedbythemostsince1969withthe

former staying elevated even as the

latterhassaggedtoitslowestpointsince

2016.

But such a divergence tends to pre-

date recessions, according to research

byDeutscheBank.

Moreover, there are fundamental

reasons to worry. Michael Wilson, chief

US equity strategist at Morgan Stanley,

noted that more than two-thirds of pur-

chasing managers’ indices around the

world are below the 50 mark,

indicatingthatactivityisfalling.

That kind of all-round slumphad not

been seen since the financial crisis, he

said.

He added that US companies’ profits

andcapital spendinghad been on a

downward trend, too, potentially lead-

ing to lay-offs. “[That] is really all that

separates the US economy from a reces-

sionaryoutcome.”

For now, most analysts remain hope-

fulthatthegloomwillnotdeepen.

Peter Berezin of BCA Research con-

cededthat“asuddendropinconfidence

can generate a self-fulfilling cycle where

rising pessimism leads to less private-

sector spending, higher unemploy-

ment, lower corporate profits, weaker

stock prices, and ultimately, even

deeperpessimism”.

But he argued that the global econ-

omy should hold up as long as the trade

wardidnotescalatefurther.

Mr Moynihan’s optimism could be

well-founded. But if economic data con-

tinues to worsen and exacerbates the

spreading pessimism, his comments

might well turn out to be this cycle’s

versionofCiti’sChuckPrince.

In July 2007, as credit markets were

beginning to seize up ahead of the Leh-

man crisis, the former chief executive

made theinfamous remark: “As long as

the music is playing, you’ve got to get up

anddance.”

Reaction by consumers and

companies to recession signals

risks aggravating growth woes

‘We have

nothing to

fear about a

recession

right now,

except for

the fear of

recession’

Bank of America

is showing

confidence in

Main Street even

as others on

Wall Street are

pointing to

negative

indicators

Richard B Levine/Alamy

Fixed income. egative yieldsN

Danger of self-fulfilling prophecy

as downturn fears mount

J O E R E N N I S O N— NEW YORK

The largest leveraged loan fund in the

US has plunged to its lowest value in

more than three years, in part because

of risky stock market bets outside its

coremandate.

TheInvesco-Oppenheimer Senior

FloatingRatefund umbled2percentint

August to a net asset value per share of

$7.62, its lowest since April 2016 and its

worstone-monthfallsincefearsoverUS

growthsentassetpricessharplylowerin

Decemberlastyear.

The disappointing August has

dragged the fund’s returns for the year

down to 2.5 per cent, significantly below

the average 6.3 per cent return of the

loan market, according to an index

run by the Loan Syndications and

Trading Association, and cementing it

as one of the worst-performingfunds

thisyear.

The poor showing comes alongside

large outflows that have cut its assets

undermanagementby$3bnto$10.4bn.

The slump stems in part from a series

of risky bets that have turned sour,

including its largest single position: a

close to 19 per cent equity stake inArch

Coal hat accounts for 2.4 per cent of thet

fund, according to data from Morning-

star. Shares in Arch, a junk-rated coal

company, slid 14 per cent last month,

reducing the value of the position by

morethan$30mto$240m.

Brian Moriarty, an analyst at Morn-

ingstar,said:“I’mcriticalofit.Anequity

position has been massively contribut-

ing to the returns of the fund. It’s not

whatinvestorssignedupfor.”

In its prospectus, the fund notes that

it may invest up to 20 per cent ofassets

outsidetheloanmarket,includingequi-

ties.Invesco, which took over the fund

when it acquired Oppenheimerthis

year,declinedtocomment.

Holding stock positions in a loan fund

is not unheard of and usually results

from a company going bankrupt and

debtbeingexchangedforequity.

However, analysts and other loan

fund managers said the Invesco fund’s

holdings are abnormally large and tend

to be held for much longer than is typi-

cal.

The fund acquired its rch CoalA

equity after the company went through

bankruptcyattheendof2016,whenthe

fund was still owned by Oppenheimer,

addingtothepositionattheendof2018,

before slowly reducing it again this year,

accordingtoBloombergdata.

The Arch Coal holding is part of a

4.1 per cent exposure to US equities in

the fund, according to Morningstar,

comparedwithanaverageofjust0.6per

centacrossUSloanfunds.

“The fund is an exception,” said Mr

Moriarty. “It is one of the most aggres-

sive in the category. They are a lot more

comfortable holding equities and hold a

lotmoreofthem.”

Asset management

Invesco loan

fund plunges

amid noncore

equities bets

Latest yield curve inversion sends warning

Spread between two-year and -year US Treasury bonds (percentage points)

Source: US Treasury

-

-

         

Recession



‘An equity position has

massively contributed to

returns. It’s not what

investors signed up for’

SEPTEMBER 6 2019 Section:Markets Time: 9/20195/ - 16:42 User:stephen.smith Page Name:MARKETS1, Part,Page,Edition:EUR , 19, 1