The Week UK 17.08.2019

CITY 51

17 August 2019 THE WEEK

Talking points

This is fast turning into “a summer of
fear” as far as markets are concerned,
said Rana Foroohar in the FT. Last
week’s volatility was ostensibly triggered
by the US-China trade conflict. But the
underlying concern among traders is that
“the global downturn has begun”. They
aren’t convinced by the US Federal
Reserve’s claim that its July rate cut was
“merely insurance” against some “future
downturn”. For evidence, one might
point to weak purchasing managers’
indexes in the US and larger European
economies, the rise in corporate
bankruptcies, or the recent spike in US
lay-offs. But plenty of “worried market
participants” are looking most closely at
the state of sovereign bond markets, and the now “$14trn horde
of negative-yielding bonds around the world”. Safe government
debt has long beenahaven for investors in times of trouble. But
when this many investors “are willing to pay for the ‘security’ of
losing onlyalittle bit of money, asahedge against losing quite a
lot, you know there’s something deeply wrong in the world”.

The current “bond-yield plunge” is certainly “hard to ignore”,
said The Wall Street Journal. “The latest flare-up in trade
tensions” has promptedawave of selling in stock markets,
helping to push bond yields (which move inversely to prices)
down to their lowest levels in years. Most significantly for the

doomsters, the “yield curve” (i.e. the

difference between what it costs the US

government to borrow money over ten

years and over two years) has “inverted”

again, said John Stepek on MoneyWeek.

com. That “almost always signals a

recession, although perhaps not for up to

two years”. Rates are extremely low in

other countries too, said Allison Schrager

on Quartz: “the entire German bond

curve is in negative territory”.

Historically, economists have assumed

bond yields will always “revert to the

mean”–but the current situation gives

the lie to that. In fact, the European

Central Bank is shortly expected to lower

rates deeper into negative territory.

Negative interest rates were first dreamt up in 1890 by Silvio

Gesell, “a colourful German businessman” who was once the

“People’s Representative for Finance in the Soviet Republic of

Bavaria”, said the FT. In recent years, they’ve been championed

by some central banks, notably Sweden’s Riksbank, to stimulate

growth after the financial crisis. Riksbank argues “the policy has

borne fruit”–but some claim exiting it is “harder than expected”.

The old theory that “zero would act asafloor for interest rates

has been shattered”. Roughly one-quarter of the global debt

market is now “trading at levels once thought improbable”. No

one knows what that will eventually mean for stability.

Issue of the week: accentuating the negative

Bearing fruit: Stefan Ingves of Sweden’s Riksbank

Making money: what the experts think

●Argy-bargy
The market pain in
Argentina became
more pronounced
this week, said Tim
Wallace in The Daily
Telegraph. And it
could get worse.
The prospect of “the
political renaissance”
of former president
Cristina Fernández de
Kirchner has “raised
the prospect of the country again
defaulting on its debt, causing markets to
go into freefall”. The peso has lost almost
athird of its value this year. And stocks
haven’t fared much better. The fallout
this week saw Argentina’s main Merval
index plummet by 31% on Monday,
with some of the country’s largest
companies worst affected. Cement
producer Loma Negra lost 55%; the
financial services firm Galicia Financial
suffereda46% value erosion.

●Dangerously “overweight”
Spareathought for “the emerging market
bond guru” Michael Hasenstab, whose
16 bond funds lost nearly $1.8bn in a
single day “during the stampede out of
Argentine assets”–making him one of the
worst losers of the slump, said the FT.
Hasenstab’s firm, Franklin Templeton,
had been “one of the biggest buyers of
Argentine debt”, but was by no means

“alone”. Indeed,

according to JPMorgan,

“overweight Argentina”

was “one of the most

crowded trades among

investors” as recently

as “the end of last

month”. Funds

managed by London-

based Ashmore Group

and investment giant

Fidelity have “suffered

sizeable losses” too.

Other top holders of Argentine debt

include BlackRock, T. Rowe Price and

Pimco. There’sagood deal of ordinary

investors’ cash riding on this rollercoaster.

●Pound land

“Bets against the pound have hit their

highest level in more than two years”

as speculators “lose confidence in the

Government’s ability to negotiateaBrexit

deal”, said Gurpreet Narwan in The

Times. Earlier this week, the pound fell

to “a decade low” ofs1.0724 against the

euro, “and speculators are braced for

further falls”. How low might sterling

go? The Office for Budget Responsibility

reckons no deal would mean an immediate

10% fall, “leaving it at parity with the

euro and about $1.10 against the dollar”.

Either way, get stuck in foraperiod of

uncomfortable autumn limbo, says Capital

Economics. “We expect uncertainty to

remain high until the eleventh hour.”

The Argentine peso: plummeting in value

Full English Brexit

At the 2016 Conservative party

conference, Andrew Davies–then

leader of the Welsh Conservatives –

made delegates sit up by pledging to

make “breakfast” (rather than “Brexit”)

asuccess. It wasaslip of the tongue,

says Ben Wright in The Daily Telegraph.

But the traditional fry-up is actually “a

pretty good illustration of some of the

issues we might face”. Here’s a

rundown of the main ingredients:

Eggs and breadThe good news is that

Britain is “entirely self-sufficient” on the

egg front. The same is true for wheat.

“We sometimes import from France or

Germany if we getapoor harvest. But

on the whole, we’ll be fine.”

Tomatoes“There’s not much fruit or

veg inafry-up, which is just as well.”

In 2017, roughly 76% of the UK’s veg

imports, and 41% of our fruit and nuts,

came from across the Channel. “We

are only 20% self-sufficient for

tomatoes.” Prices could rise by at

least 5%. They could becomeaFull

English disaster-zone.

Bacon and sausageLots of pigs are

reared here, “but we British are

squeamish about which bits we like

to eat” (except when disguised in

sausages). The upshot is that “we

importalot of bacon” from

Denmark–and tend to export the more

disagreeable bits. There’sagood

chance, then, that bacon prices will rise

post-Brexit, and sausage prices will fall.

The strange “sub-zero” bond market has becomeafocus of anxieties about the global economy