Friday2 August 2019 ★ FINANCIAL TIMES 23MARKETS & INVESTING
RICHARD HENDERSON— NEW YORKThe breakneck growth in corporate
share buybacks that has helped propel
the stock market to record highs is
starting to cool at a pivotal time for US
equities, as concerns around a slowing
global economy, trade tension and a
dovish central bank weigh heavily.Buybacks are set to hit a total of $940bn
this year, according to Goldman Sachs
estimates, up 13 per centon last year’s
total but a sharp deceleration from the
54 per cent growth seen in 2017-18.
Last year’s spurt was driven by a cut to
the corporate tax rate from 35 per cent
to 21 per cent, which prompted US com-
panies to spend $833bn on their own
stock.
Bank of America analysts have also
noted a slowdown. Based on an analysis
of its own corporate clients’ buying
trends, the bank said these companies
were spending 12 per cent more on buy-
backs this year, a fraction of last year’s
growth.
“Heading into the peak of earnings
season, corporate buybacks picked up
slightly last week,” Jill Hall, equity and
quant strategist for Bank of America,said in a research note. “But the growth
rate for cumulative buybacks year to
date continued to slow to 12 per cent
year-over-year. We have expected the
pace of buybacks to slow as we move
into 2020.”
The slowdown in buyback growth
sounds a cautious note for equity inves-
tors in the midst of second-quarter
earnings.
Stock repurchases reduce the amount
of shares that trade on the stock
exchange, improving key metricslikeearnings per share, which typically
boosts a company’s share price. For the
past decade, buybacks have outranked
dividendsas the favoured mechanism
for returning cash to shareholders.
The deceleration adds another layer
of uncertainty for equity investors
alongside the spectre of slowing growth,
trade tension and the Federal Reserve’s
ambiguous stance on interest rates.
On Wednesday, the Fed cut the rateby
0.25 percentage points — its first reduc-
tion since the financial crisis of 2008 —
sending the S&P 500 1.1 per cent lower
by the end of the trading day.
Apple, the biggest buyer of its own
stock, highlighted this week the benefits
of buybacks — its quarterly results
showed a near 13 per cent year-on-year
slide in net income but, thanks to the
reduction in its share count, its earnings
per share were down just 7 per cent.
“The trend we’re seeing today is
nowhere near as strong as 2018 but
companies are still growing earnings
and they are still going to give that
money to shareholders through buy-
backs and dividends,” said Patrick
Palfrey, senior equity strategist for
Credit Suisse.Equities
Mood of caution as US companies take
foot off the pedal on stock buybacks
LAURENCE FLETCHERHedge fundCitadelhas boosted its
team specialising in bonds and curren-
cies with three new fund managers as it
looks to capitalise on the market
opportunities thrown up by dramatic
central bank shifts towards looser
monetary policy.Jonathan Bayliss, former head of macro
rates and a partner at Goldman Sachs
Asset Management who has also
worked at hedge fundTudor, has been
hired as a senior fund manager in Lon-
don, according to people familiar with
the firm’s plans.
Mr Bayliss, who will be part of the
macro strategies team, is set to join the
firm later this year.
The hedge fund, which was founded
by traderKen Griffinand which runs
$32bn in assets, has also hired Vishnu
Kurella as a senior fund manager in New
York. Mr Kurella, who specialises in
cross asset volatility and who previously
worked at hedge fund Caxton, is set to
join next month.
Eric Rains, who previously worked at
hedge fundBlueMountain, will join as a
fund manager in Mr Kurella’s team.Citadel declined to comment. The
hires reflect a significant pick-up in
opportunities for macro hedge funds,
which have chalked up their best half-
year of returns since 2013 at 5.01 per
cent, according to data from HFR.
Macro funds, made famous by the
likes ofGeorge SorosandPaul Tudor
Jones, bet on moves in global bond, cur-
rency and stock markets.
Such funds have struggled in recentyears amid huge stimulus from central
banks and ultra-low interest rates that
have proved hard to profit from.
However, many are capitalising on
the large fall in bond yields this year —
the yield on the 10-year US Treasury has
fallen from 2.69 per cent to 2.05 per cent
and the 10-year German Bund yield has
dropped from 0.25 per cent to minus
0.42 per cent — as central banks have
performed a U-turn from tightening toloosening monetary policy. That has
proved a profitable trade for funds bet-
ting on a return to lower borrowing
costs.
“Every central bank is live right now,”
said one macro hedge fund executive.
“The opportunity set is as full and
robust as it has been in many years.”
Among those making money from the
bond market rally isCaxton Associates,
whose main fund is up more than 13 per
cent, whileBrevan Howardhas gained
around 10 per cent,one of its best half-
year of performancessince the financial
crisis.
Profits on macro trades have helped
Citadel’s flagship Wellington fund gain
about 15 per cent so far this year, said a
person who had seen the numbers, hav-
ing risen 9.1 per cent last year.
The hires also come as some rival
firms cut back on their macro trading
amid lacklustre performance.
Element Capitalrecentlycut around
one-tenth of its staffand closed its port-
folio manager programme.
Citadel’s new recruits will be part of a
team led by Colin Lancaster, who joined
the firm at the start of last year from Bal-
yasny to build out a macro trading team.Asset management
Citadel hires bond and currency traders
to profit from U-turn by policymakers
‘Every central bank is live
right now. The opportunity
set is as full and robust asit has been in many years’
Traders monitor news of the Fed’s
cut in interest rates on WednesdayFastFT
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ft.com/fastftTOMMY STUBBINGTONInvestors have spent the past six weeks
gearing up for Mario Draghi’s last stand.
Since the European Central Bank presi-
dent hinted in a speech in mid-June that
he plans to end his tenure with a pack-
age of fresh stimulus measures, markets
have been in party mode with eurozone
stocks and bonds chalking up big gains.
One sector, however, has been notably
absent from the festivities: the region’s
banks.
Lurking behind the market euphoria
over the prospect of Mr Draghi’s parting
gift is a concern that ECB easing is slowly
strangling eurozone lenders.
While government bond yields have
hit record lows and the Stoxx Europe
index has rallied 15 per cent this year,
the financials sub-index of stocks has
fallen slightly.
Sub-zero rates have been widely
blamed for exacerbating the recent
woes atDeutsche Bank, which has
embarked on 18,000 job cuts as part of a
turnround plan.INGchief executive
Ralph Hamerslashed out against the
ECB this week, saying it is “not the
moment” for further easing, which
would hurt consumer confidence.
That, in turn, has prompted a broaderworry — that, by hobbling the banking
sector, the ECB might blunt the overall
benefit to the economy of rate cuts.
“If you want monetary policy to work,
you need a healthy banking sector,” said
Salman Ahmed, chief investment strat-
egist at Lombard Odier Investment
Management. “If you pile too much bur-
den on to the banks, more rate cuts
become counterproductive.”
Such concerns look set to rise with Mr
Draghi widely expected in September to
further cut the central bank’s deposit
rate as well as possibly reviving its bond-
buying programme.
Negative interest rates function like a
tax on banks. Eurozone banks currently
park more than €1.7tn of excess liquid-
ity at the central bank.
With the ECB’s deposit rate currently
at minus 0.4 per cent, the total cost is
around €7bn a year. At the same time, it
is tough for lenders to pass this burden
on to their customers in the real world —
no one wants to charge individual cus-
tomers for their deposits as UBS is plan-
ning to dowith some very wealthy Swiss
clients. The result is a painful squeeze
on margins.
The ECB has a plan to sugar the pill of
even lower rates, by exempting part of
these excess reserves from the punitive
charge — a so-called tiering of negative
interest rates.
Such plans would bring relief to the
big banks in the eurozone’s core coun-
tries, which account for the lion’s share
of the excess reserves at the ECB — Ger-many, France, the Netherlands, Bel-
gium, Austria and Luxembourg make
up more than 80 per cent, according to
Apolline Menut, eurozone economist at
Axa Investment Managers.
The concentration of reserves in just a
few countries’ banking systems means
the benefits from tiering would also be
concentrated. Regional banks in Italy
and Spain, some of which are more reli-
ant on retail deposits than the big multi-
nationals, would see little relief.
For the banking system as a whole,
the precise design of the tiering system
is a thorny issue.
“There is a fine balance to strike:
exempting too many deposits from the
negative deposit charge could create a
tightening in financial conditions simi-
lar to a rate hike,” said Ms Menut. “And
exempting only a small portion of
deposits from the deposit charge basi-
cally limits the purpose of tiering.”
The ECB itself has been keen to point
out that the damage done to bank prof-
its by negative rates has been offset by
other, more positive, effects of its stimu-
lus efforts. The central bank’s vice-pres-
ident, Luis de Guindos, said last month
that the overall effect of its monetary
policy on banking sector profitability
has been “broadly neutral”.
“Nevertheless, the overall effects of
negative rates on the banking sector
need to be carefully monitored, particu-
larly because the balance of their effects
will depend on how long rates remain in
negative territory,” Mr de Guindosadded. This final point is perhaps of
greatest concern to investors in Euro-
pean banking stocks. Talk of tiering
seems the ultimate confirmation that
deeply sub-zero rates are here to stay.
“The thought that is troubling inves-
tors is the possibility that rates will be
even lower for longer and fall back here
periodically in the future, and that
sounds like a structural squeeze on the
net interest margins,” said Richard
Barwell, head of macro research at BNP
Paribas Asset Management.
There are other ways Mr Draghi could
seek to ease the pain. The ECB has so far
stopped short of buying bank debt
under its quantitative easing pro-
gramme, in part because of a potential
conflict of interest arising from its role
as a financial sector regulator.
A new round of QE may be forced to
dispense with such scruples, said Jeffer-
ies economist Marchel Alexandrovich.
In addition to lowering banks’ borrow-
ing costs, this move would allow the ECB
to beef up its bond-buying at a time
when sovereign debt is in short supply. “It
kills two birds with one stone,” he said.
For now, there is little sign of the
gloom lifting from the eurozone’s bank-
ing sector. On a recent trip to the US, Mr
Alexandrovich found fund managers
reluctant to touch the sector.
“If the next move in interest rates is
going to be down, it’s difficult to build an
optimistic case for the banks,” he added.
“For investors who have the choice of
going elsewhere, it’s a difficult sell.”Financials are braced for the
impact of squeezed margins
due to monetary policy shift
‘If the next
move in
rates isdown, it’s
difficult tobuild an
optimisticcase for
the banks’The European
Central Bank
has been
criticised by the
region’s banks
over monetary
easing plans
Krisztian Bocsi/BloombergEquities.Stimulus plans
Banks fear being big losers as
ECB easy money flows again
HARRY DEMPSEYCentral banks purchased a record
$15.7bn of gold in the first six months of
the year in an effort to diversify their
reserves away from the US dollar as glo-
bal trade tension continues to simmer.
Data released by the World Gold
Council yesterday showed central
banks, led by Poland, China and Russia,
bought 374 tonnes of gold—the largest
acquisition of the precious metal on
record by public institutions in the first
half of a year. Central banks accounted
for nearly one-sixth of total gold
demand in the period.
The pattern advances on last year’s
activity in which central banks bought
up more gold than at any time since the
end of the gold standard — under which
a country could link the value of its cur-
rency to the precious metal — in 1971.
The shift in attitude towards gold
since the financial crisis was highlighted
by a European Central Bank decision
last week to cease an agreement to limit
sales of gold, as the region’s institutions
are no longer selling it in large volumes
and are instead now net purchasers.
Overall, year-on-year demand for
bullion rose 8 per cent to 1,123 tonnes in
the second quarter, lifted by central
bank buying and investors piling into
gold-backed exchange traded funds.
Dovish comments from centralbanks, geopolitical instability and rising
gold prices encouraged investors to top
up, with ETF gold holdings up 67.2
tonnes in the second quarter to a six-
year peak of 2,548 tonnes.
Demand was further supported by a
recovery in India’s jewellery market in
Q2, with year-on-year demand rising 12
per cent to 168.6 tonnes.However, as the
June price rose above $1,400 a troy
ounce for the first time in six years,
demand for gold in the jewellery and
retail investment markets softened.
“June was a big month for gold,” said
Alistair Hewitt, head of market intelli-
gence at the WGC. “While the Fed’s
dovish turn was the key driver for this, it
also builds on a strong first half of the
year, which saw gold demand hit a
three-year high, underpinned by
extremely strong central bank buying.”
The US Federal Reserve announced
on Wednesday its first interest rate cut
for more than a decade.
UK-listed funds accounted for three-
quarters of exchange traded gold prod-
ucts bought by value. This was drivenby
a desire to hedge against uncertainty
over the outcome of the UK’s Conserva-
tive party leadership election, concern
about a disorderly exit from the EU and
a sharp plunge in the value of the pound.
The WGC expects looser monetary
policy and geopolitical uncertaintyto
keep pressure on central banks to build
gold reserves.Commodities
Record gold
buying spree
in scramble
to diversify
reserves
‘June was a big month
for gold, underpinned
by extremely strongcentral bank buying’
Sources: Refinitiv; ECBExcess cash parked
at the ECB has soared- - - - Excess liquidity
(tn) Deposit rate
()Banks have lagged
behind in Europe’s stock rally
Indices rebased Jan JulStoxx Europe
Stoxx Europe Banks
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