20 ★ Friday26 July 2019

Bob Michele

Markets Insight

US airline stocks were under pressure

afterSouthwestsaid it would extend

flight cancellations tied to the grounding

of Boeing’s 737 Max jet until the first

week of January.

A warning fromSpirit Airlinesalso

dented sector confidence with the low-

cost carrier saying non-fuel costs had

spiked higher.

It blamed pilot shortages, overly

aggressive flight scheduling and

unhelpful weather. “This is one of the

largest cost-side changes we’ve seen in a

while for an airline without direct Max

exposure,” said Citigroup.

Ford Motordived after warning that

2019 earnings per share may be as low as

$1.20 compared with a £1.40 consensus.

Second-quarter results from Ford

showed North American volumes and

margins under pressure due to a heavy

schedule of product launches.

Align Technology, the maker of dental

equipment, slumped as a profit warning

stoked competition concerns.

Disappointing shipments of clear

aligners weighed as millennials chose

teeth straighteners sold directby

companies such asSmileDirectClub.

Building materials supplierMascoled

the S&P 500 gainers on better than

expected half-year earnings.Bryce Elder

Wall Street Eurozone London

Nokiawas the standout gainer in a wider

market whipsawed by a European Central

Bank that signalledit would cut rates

later this year.

The Finnish network equipment maker

reported 5 per cent sales growth on

improved margins as demand for 5G

technologies accelerated.

Management stuck by full-year targets

and flagged up a larger addressable

market. It was enough to trigger a relief

rallyfollowing cost overruns and

execution problems earlier in the year.

Clariantwas amongfallers after

shelving plansfor aventure withSaudi

Basic Industries Corp, its 25 per cent

shareholder, and putting its pigments

business up for sale.

The Swiss chemicals maker blamed

“market conditions” for the decision,

which came with interim results that

missed expectations.

Konecranesof Finland slid on half-year

results showing margins under pressure

at its industrial equipment division due to

delivery costs.

Bureau Veritas, the French testing

and certification specialist, rose as better

than expected quarterly figures raised

hopes that debt was under control and

returnscould now be improved.

Bryce Elder

AstraZenecaled the FTSE 100 gainers on

better than expected second-quarter

sales and earnings and a boosted full-

year product sales target.

Cash generation — a longstanding

investor concern — also improved.

Aston Martinhit another record low.

Panmure Gordon said that, rather than

cutting capital expenditure in the wake of

this week’s profit warning, the luxury car

maker should be looking to keep its

turnround plan on track by raising £1bn

with a rights issue.

Metro Bankslid after reporting £2bn of

deposit outflows in the first half and

cutting profitability targets.

Sagewas under pressure after cutting

margin guidance. Quarterly organic

growth also disappointed as a shift to

cloud subscriptions meant Sage’s legacy

software lines shrunk.

Cobhamwas the FTSE 250’s biggest

gainer after the aerospace and defence

engineer agreed to a £4bn bid from

buyout fundAdvent International.

Burford Capitalretreated after interim

results from the litigation financing

specialist showed a reduction in cash and

equivalents on the balance sheet, which

revived worries that it would need a

capital injection to reach targets for new

business.Bryce Elder

3 German stocks decline after Draghi’s

ECB press conference

3 Bund yields near new low before

rally unravels

3 Tesla and Ford weigh on Wall Street

following disappointing results

All eyes were on Mario Draghi yesterday

as the European Central Bank signalled

its intention to cut interest rates and

embark on a fresh round of asset

purchases later this year.

European stocks slipped in the wake of

the central bank announcement, with the

ECB’s concern about an economic

slowdown adding to investor wariness

over the effectiveness of any new

stimulus.

Equities in export-reliant Germany

ended the day down 1.4 per cent after the

ECB president warned of the

manufacturing outlook “getting worse

and worse” for Europe.

“He’s doing his best to support the

eurozone,” Oliver Blackbourn, portfolio

manager at Janus Henderson Investors,

told Reuters, “but we’re reaching the

point where they are running out of

ammunition and at some point you’ll see

questions about credibility.”

The euro went on a volatile run,

bouncing off two-year lows to rise 0.2 per

cent overall, at $1.1169, as Mr Draghi

spoke.

Meanwhile, a rally for the region’s

government bonds faded, with the yield

on 10-year German Bunds rising 1.1 basis

points, having dipped to minus 0.424 per

cent earlier, close to another record low.

The Stoxx Europe 600 index closed 0.

per cent lower, with basic materials and

technology sectors weighing on the

continent-wide benchmark.

Teslawas another tech group that

weighed on sentiment. Shares in the

electric-car maker had plummeted almost

14 per cent by midday in New York after it

posted a deeper than expected quarterly

loss. The fall contributed to a 0.7 per cent

dip in the Nasdaq Composite index.

Fordwas another carmaker among the

S&P 500 index’s biggest fallers. The

group slid more than 7 per cent after it

reported lower than expected profits.

The S&P 500 was 0.7 per cent lower,

while the Dow Jones Industrial Average

was 0.5 per cent softer.

Brent crude, the international

benchmark, was 0.5 per cent higher at

$63.52 a barrel, while WTI, the US marker,

advanced 0.7 per cent, at $56.23 a barrel.

Gold fell 0.1 per cent, retreating from

recent highs to reach $1,413.20 an ounce.

Nikou Asgari

What you need to know

German stocks dip in the wake of Draghi comments

Xetra Dax index

Source: Bloomberg















  Jul  

The day in the markets

Markets update

US Eurozone Japan UK China Brazil

Stocks S&P 500 Eurofirst 300 Nikkei 225 FTSE100 Shanghai Comp Bovespa

Level 3006.02 1531.54 21756.55 7489.05 2937.36 102737.

% change on day -0.45 -0.54 0.22 -0.17 0.49 -1.

Currency $ index (DXY) $ per € Yen per $ $ per £ Rmb per $ Real per $

Level 97.860 1.116 108.550 1.250 6.875 3.

% change on day 0.134 0.180 0.449 0.000 0.006 0.

Govt. bonds 10-year Treasury 10-year Bund 10-year JGB 10-year Gilt 10-year bond 10-year bond

Yield 2.080 -0.365 -0.155 0.706 3.175 7.

Basis point change on day 2.600 1.300 -0.310 2.800 1.900 4.

World index, CommodsFTSE All-World Oil - Brent Oil - WTI Gold Silver Metals (LMEX)

Level 348.98 63.62 56.26 1426.95 16.54 2853.

% change on day -0.44 0.74 0.57 0.10 0.64 0.

Yesterday's close apart from: Currencies = 16:00 GMT; S&P, Bovespa, All World, Oil = 17:00 GMT; Gold, Silver = London pm fix. Bond data supplied by Tullett Prebon.

Main equity markets

S&P 500 index Eurofirst 300 index FTSE 100 index

||||||||||||||||||||

May 2019 Jul

2720

2880

3040

||||||||||||||||||||

May 2019 Jul

1440

1480

1520

1560

||||||||||||||||||||

May 2019 Jul

7040

7200

7360

7520

7680

Biggest movers

% US Eurozone UK

Ups

Masco 6.

Technipfmc 5.

Bristol-myers Squibb 5.

Lkq 4.

Raytheon 3.

Bureau Veritas 4.

Ab Inbev 4.

Danone 2.

Publicise 2.

Carrefour 2.

Astrazeneca 7.

Compass 2.

Coca-cola Hbc Ag 1.

Whitbread 1.

Crh 1.

%

Downs

Align Technology -26.

Varian Medical Systems -8.

Ford Motor -6.

Nektar Therapeutics -6.

Dish Network -6.

Prices taken at 17:00 GMT

Ucb -5.

Reed Elsevier -3.

Dassault Systemes -3.

Mapfre -2.

Stmicroelectronics -2.

Based on the constituents of the FTSE Eurofirst 300 Eurozone

Sage -10.

Sse -7.

Relx -3.

Rentokil Initial -3.

St. James's Place -3.

All data provided by Morningstar unless otherwise noted.

T

en-year US Treasury yields

could be headed to zero.

This is not a forecast. This is

not a bold prediction. This

is not something that we

hope happens. This is an observation of

what is unfolding in the markets right in

front of us.

The 10 year yield peaked at 3.25 per

cent in November last year and has

fallen relentlessly, to as low as 1.93 per

cent earlier this month.

Today, about one-third of the global

government bond market and one quar-

ter of the global aggregate bond market

have negative yields. We should con-

sider it a warning — that this is the path

the US market is on unless there is an

adequate policy response.

What is surprising is that the dra-

matic decline in yields has happened

against a backdrop that would have sug-

gested otherwise. The last move by the

US Federal Reserve was to raise interest

rates in December. The central bank is

also in the process of running down its

balance sheet by up to $35bn per month.

Assets in US money market funds

have increased steadily over the past

nine months to about $3.3tn, the highest

level since the financial crisis, when the

Fed provided an unlimited guarantee to

these funds. Equities, gold and crypto-

currencies have all risen strongly.

The US economy could be character-

ised as “OK”. So, what is driving the

flows into US government bonds and

where is the money coming from? More

importantly,where do yields go now?

Quite simply, the money is pouring

into the US bond market from overseas.

As the volume of negative-yielding debt

grows across Europe and Japan, inves-

tors are seeking a haven that has a posi-

tive return. US investors have neither

embraced the decline nor pushed back

against it. As trade tension escalates, the

probability of recession rises.

There is also the very real risk that

inflation expectations have become

unanchored and central banks are grad-

ually becoming powerless. New York

Fed president John Williams captured

this risk nicely this month bysayingthat

“investors are increasingly viewing

these low inflation readings not as an

aberration but rather a new normal”.

While there has already been a dra-

matic decline in US yields, an acceler-

ated move lower is potentially in the off-

ing. If, as expected, the Fed begins a

rate-cutting cycle at the end of this

month, money will be shaken out of

money market funds into bond funds in

an effort to lock up a higher yield.

A second vast pool would come from a

return to balance sheet expansion: the

Fed is set to end its balance sheet run-off

in September just as the European Cen-

tral Bank returns toquantitative easing.

A third pool of money could come

from de-risking.From current levels,

the combination of central bank action

and de-risking would accelerate the

journey of US bond yields toward zero.

This is not healthy for saversor for

insurance companies and pension funds

that have returns targets to meet.

There needs to be a policy response

that is swift and dramatic enough to

stop this descent in its tracks while

reigniting growth and inflation expecta-

tions. A starting point is with the central

banks and the Fed in particular. It must

respond at month-end with “shock and

awe” to regain control. A mere 25 basis

point cut by the Fed will probably be

dismissed by the markets.

Whether policymakers cut by 25bp or

50bp, they must make it clear that they

mean business and will do whatever it

takes from that point onward to raise

inflation expectations.

For their part, the ECB and Mario

Draghi, outgoing president, got the ball

rolling yesterday by indicating that a

significant degree of monetary stimulus

is both needed and forthcoming.

While multiple significant central

bank policy responses are likely to hap-

pen, it is important to remember that

monetary accommodation alone is not

enough to avoid recession this late in an

economic expansion.

Otherwise, we would never have

recessions. Will it buy enough time for a

policy response to happen elsewhere?

While there could be a de-escalation in

trade tariffs, the direction of travel over

the past 18 months has not been encour-

aging. It would also be nice to see some

co-ordinated fiscal stimulus.

But which government has the cour-

age and ability to embark on a big

spending programme?

The central banks must take the lead

and they must start this month. They

must bring front-end real yields so low

and so fast, that the yield curve steep-

ens. That will cause investors to ques-

tion the wisdom of holding longer matu-

rity bonds.

Anything short of that risks the

10-year US Treasury remaining on the

well-worn path, forged by Japan and

Germany, toward zero.

Bob Michele is global head of fixed income

at JPMorgan Asset Management

‘Shock and awe’ must

be Fed response to

threat of zero yields

Which government has

the courage and ability

to embark on a big

spending programme?

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