Tuesday20 August 2019 ★ FINANCIAL TIMES 19MARKETS & INVESTING
HENRY SANDERSONThe price of coal used in power stations
in Asia has fallen to its lowest level in
three years due to fading demand in
India and China, the two biggest coal
consumers.Having surged to $120 a tonne last sum-
mer, the Australian benchmark sea-
borne price of thermal coal fell has
fallen by 44 per cent to $61 a tonne,
according to S&P Global Platts.
Coal’s fall is being driven by slower
growth in power demand in China, the
world’s largest coal consumer, as well as
ample supplies of the fuel, according to
analysts.
The slump comes as coal faces
increasing competition around the
world from cleaner, renewable energy
such as wind and solar, as well as cheap
natural gas.
Coal’s weakness is likely to hit earn-
ings for the largest coal miners includ-
ingGlencore,Anglo AmericanandBHP
Billiton. Shares in Glencore, which relies
on thermal coal for almost one-fifth of
its earnings, have dropped by 20 per
cent this year.
Michelle Liu, an analyst at CRU con-sultancy in London, said China’s
demand for coal has weakened due to a
slowdown in the manufacturing indus-
try, which accounts for about 70 per
cent of national power demand.
“The slowdown... caused by struc-
tural economic changes and the trade
war is having a significant, negative
impact on the thermal coal market,” Ms
Liu said.
Chinese power consumption in the
manufacturing industry grew by 3.1 per
cent in the first half of this year — asharp drop compared with 7.6 per cent
over the first six months of 2018,
according to the National Bureau of Sta-
tistics.
While overall Chinese power genera-
tion grew by 3 per cent in the first seven
months of this year, coal-fired power
generation was flat from a year earlier,
due to strong growth in hydropower and
nuclear.
Ahead of the upcoming 70th anniver-
sary of the People’s Republic of China in
October, Chinese authorities were also
focused on curbing pollution, further
squeezing coal demand, according to
Kash Kamal, an analyst at BMO Capital
Markets.
A push for cleaner skies is “capping
prices at a time when demand is already
subdued given seasonality”, he said.
The price weakness in thermal coal
this year was caused initially by a glut of
cheap gas in Europe, which caused utili-
ties to switch to gas over the winter and
prompted coal suppliers to switch to
selling to Asian markets.
But while demand in China has weak-
ened, India is slackening too, said Ms
Liu, as the country gets deeper into the
traditionally weaker monsoon season.Commodities
Chinese and Indian slowdown knocks
Asian thermal coal to three-year low
PHILIP GEORGIADIS— LONDONBets against the pound have been cut
for the first time since the beginning of
June as the currency recovers from
recentlowsbut analysts warn volatility
still looms with the Brexit deadline just
10 weeks away.Traders are grappling with how to price
sterling amid deep political uncertainty
as the chances of a disruptive exit have
risen after Boris Johnson was appointed
UK prime ministerin Ju ly.
Opposition efforts to stop the UK
crashing out of the EU have offered the
pound some respite, although many in
the foreign exchange market are scepti-
cal about their chances of success.
Fund managers and other companies
betting in the futures market trimmed
their bets that the pound will fall in the
week to August 13 after adding to them
for eight consecutive weeks.
“Non-commercial” players in the
futures markets — a category that
includes individual investors, hedge
funds and other asset managers — are
still betting heavily against the pound
but decreased their short positions to
95,820 contracts, from a more than two-year high of 102,720 the previous week,
according to Commodity Futures Trad-
ing Commission data.
Kit Juckes, global head of foreign
exchange strategy at Société Générale,
said the data suggested “100,000 is
about as big a net sterling short as the
market can cope with”.
He added: “The net short got close to
2017’s maximum but failed to breakthrough and sterling found a bit of sup-
port too.”
Sterling rose nearly 1 per cent against
the US dollar last week to trade back
above $1.21, following four consecutive
weeks of losses as Mr Johnson has pub-
licly embraced the possibility of leaving
the EU without a deal in October.
Against the single currency, the pound
rose 2 per cent to trade above €1.09.
“This is a very tentative recovery
because there is still uncertainty,” saidAntje Praefcke, senior foreign exchange
strategist at Commerzbank.
The pound was the best performing
developed market currency last week,
according to Bloomberg data, but fresh
selling pressureyesterday underlined
concerns over parliament’s chances of
blocking Mr Johnson.
Neil Jones, head of foreign exchange
sales for financial institutions at Mizuho
Bank, said: “The market is having some
doubts over the anti-Brexit uprising in
parliament”. The weekend’s bleak
reportsabout the UK’s no-deal contin-
gency planning, code-named “Opera-
tion Yellowhammer”, were also weigh-
ing on the currency.
“While MPs that are opposed to a no-
deal Brexit have made baby steps in the
direction of blocking a EU exit without a
deal, they are still a long way from
achieving that objective,” said Silvia
Dall’Angelo, a senior economist at
Hermes Investment Management.
The outcome of parliament’s confron-
tation withMr Johnson’s government is
unlikely to emerge much before the
Brexit deadline, she added, meaning
“September and October could be
wildly volatile months for sterling”.Currencies
Bets against sterling cut but fears of
looming no-deal volatility persist
‘MPs that are opposed to a
no-deal Brexit have made
baby steps in the directionof blocking an EU exit’
Slower growth in power demand in
China has hit the thermal coal priceFastFT
Our global
team gives you
market-moving
news and views,
24 hours a day
ft.com/fastftLEO LEWIS— TOKYOMany traders in Japan had a tough
return to work from anational holiday,
arriving at their desks yesterday to find
speculative net long positions in the yen
heading towards a record high and the
central bank facing one of its toughest
tests in years.
JPMorgan strategist Tohru Sasaki
highlighted the core conundrum in a
note published last week. The big global
fall in interest rates would, if sustained,
present the Bank of Japan with an
impossible choice, he said.
The BoJ could either tolerate larger
negative side-effects for thefinancial
systemby allowing Japanese govern-
ment bond yields to keep sliding or it
could defend them — and risk further
strength in the yen as investors buy
relatively high-yielding JGBs.
Other analysts said the BoJ’s policy
framework was under the spotlight at a
time of both falling yields on the 10-year
JGB and the background risk of a higher
yen produced by the trade tension
between the US and China.
Under its yield curve control frame-
work,introducedalmost three years
ago, the BoJ targets yields on the 10-year
JGB at “around zero” but has stood by
without action as yields have dipped to
three-year lows of -23 basis points. Since
early February, in fact, Japan has
belonged to a growing club of sovereign
issuers with benchmark 10-year bond
yields in negative territory.Investors expect that, at the BoJ’s next
meetingin September, it could expand
its ¥6tn ($56bn) annual purchases of
exchange traded funds by a further
¥2tn as part of a long battle to push
inflation closer to its 2 per cent target.
But Haruhiko Kuroda, BoJ governor,
has so far not appeared ready to
embrace the kind of radical stimulus
that could steepen Japan’s yield curve,
weaken the yen and nudge inflation
higher than the current 0.5 per cent,
said Mansoor Mohi-uddin, foreign
exchange strategist at NatWest Markets.
That could involve the BoJ “cutting its
deposit rate, increasing government
bond purchases and ultimately co-ordi-
nating with the finance ministry on buy-
ing freshly issued JGBs”, he said.
Such action would, of course, inflict
more pain on the nation’s banking sec-
tor, which has struggled to eke out prof-
its in a world of ultra-low rates and has
urged the BoJ to hold off from further
easingmeasures.
So how have markets responded?
After rising sharply this month, theJapanese currency has settled into a
groove at about ¥106 against the US dol-
lar, resuming its role as a highly sensi-
tive proxy for global risk appetites. Over
the 12 months to the end of July, it had
averaged almost ¥111.
The standard explanation for the
yen’s recent strength is solid enough. As
Shusuke Yamada, Bank of America
Merrill Lynch strategist, said: “Markets
are increasingly worried about a global
slowdown, central banks are easing
around the world and, among them the
BoJ is the one with the least policy
ammunition left.”
As a result, he expected the yen’s
appreciation to continue, pushing it as
high as ¥101 by December.
Zach Pandl, Goldman Sachs strate-
gist, recommended that investors stick
with long yen positions through this
week’s Fed symposium in Jackson Hole,
Wyoming. There are plausible out-
comes, he argued, in which both dovish
or hawkish comments from the US cen-
tral bank could be bullish for Japan’s
currency.“If chair [ Jay] Powell and other Fed
officials signal substantial easing still to
come, the narrowing in the rate differ-
ential should push the dollar-yen rate
lower,” he said. “If, instead, policymak-
ers emphasise the still-decent domestic
growth data and appear wary of deep
rate cuts, risky assets will most likely
underperform while safe havens, like
the yen, outperform.”
That, in turn, is likely to weigh on Jap-
anese stock prices, which have risen
only slightly this year, underperforming
most developed markets.
As the yen picked up and showed
signs that it might break higher than its
long-term trading range, analysts have
rolled out warnings on what effect that
could have on corporate profits.
Masatoshi Kikuchi, Mizuho strategist,
warned that larger Japanese companies
have not yet adjusted their forex
assumptions to reflect the yen’s new
strength against the dollar and euro —
and that a majority are still basing their
net income guidance on a rate of ¥110.
But Nicholas Smith, CLSA strategist,
calculated that each ¥1/$ of yen
strength depresses Topix pre-tax profits
by only 0.2 per cent. Even then, he said,
the strength needed to be maintained
for a year to have that effect. “The cur-
rency gets far more attention than its
impact on profits really justifies.”
For now, though, it is no surprise that
investors see clearer opportunities to
make money elsewhere.
In its latest survey of global fund man-
gers, Bank of America Merrill Lynch
found investors are their most under-
weight Japan since December 2012 —
the month Shinzo Abe became prime
minister with a plea for the world to pile
in to Japanese assets.Tokyo policymakers face tough
choice of risky forex moves or
inflicting more pain on banks
‘The yen
gets moreattention
than itsimpact on
profitsreally
justifies’Haruhiko
Kuroda, Bank of
Japan governor,
is not ready to
embrace more
radical stimulus
yet, say analysts
Kim Kyung-Hoo/ReutersCurrencies.Stimulus dilemma
Global debt rally puts BoJ
in a bind over stronger yen
Traders bet on a stronger yen
Citi PAIN index (net investor positioning, positive long, negative short)Sources: Citigroup; Bloomberg- - COLBY SMITH— NEW YORKThe US government received a tepid
reception from Wall Street for the idea
of issuing super long-dated Treasuries
that would mature in 50 or even 100
years to take advantage of the collapse
in borrowing costs.
The Treasury said late on Friday that
it would again test market appetite for
bonds longer than the current 30-year
maximum, following the biggestbond
rallyfor more than two decades.
Such a move would align the US, the
world’s biggest borrower, with other
“century bond” issuers such as Austria,
Belgium and Ireland.
Prices for such paper have soaredas
investors scramble to find debt that has
relatively high yields and low risk.
Last week, 30-year Treasuries traded
with a yield below 2 per cent for the first
time while about a quarter of the debt
issued globally by governments and
companies is trading with negative
yields.
In this environment, issuance of
ultra-long dated bonds could be a “great
idea” and “overdue,” said Peter Tchir,
head of macro strategy at Academy
Securities, noting that much of corpo-
rate America and the rest of the world
has extended the maturitieson its debt
to lock in cheaper borrowing costs.
However, other strategists arguedthat it was unlikely that Treasury would
press ahead, given that a report two
years ago — put together at the behest of
Steven Mnuchin, Treasury secretary —
concluded that there was no “notably
strong or sustainable” demand for debt
beyond 30 years in the US market.
“I don’t think the demand profile has
materially changed [since then],” said
Mark Cabana, an interest rates strate-
gist at Bank of America Merrill Lynch.
Michael Cloherty, the head of US rates
strategy at RBC Capital Markets, said
that the sheer size of the US debt stock —
some $22tn of outstanding securities,
rising about $1tn a year — meant that
issuing super-long debt would not make
a significant dent in the government’s
overall borrowing costs.
While it may seem attractive to make
a grab for cheap long-dated debt now,
“the US can’t be opportunistic in its issu-
ance”, he added. “[They] have to issue it
in all sorts of interest rate environ-
ments... and while now it is cheap for
them to issue longer-dated paper, the
vast majority of the time it is expen-
sive.”
Jon Hill at BMO Capital Markets said
the potential illiquidity of 50-year or
100-year debt further muddied the
outlook.
Natural buyers would be “buy-and-
hold” investors, he said, meaning that
the bonds would be unlikely to trade
frequently.
As a result, the US might find it is not
as cheap to borrow as hoped.Fixed income
US Treasury’s
long bond
idea draws
tepid response
‘While now it is cheap for
them to issue longer-dated
paper, the vast majority ofthe time it is expensive’
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