Financial Times UK - 03.03.2020

Tuesday 3 March 2020 ★ FINANCIAL TIMES 23

M A R K E T S & I N V E ST I N G

E VA SZ A L AY

The euro’s powerful run higher
continued yesterday with the currency
gaining more than 1 per cent against
the dollar to mark the sixth consecu-
tive day of appreciation during the
worseningcoronaviruscrisis.

The currency typically falls in times of
market stress but it has broken with its
familiar patterns to rally while the virus
has spilled beyond China and raised
concerns over global economic growth.
The exchange rate hit $1.1163 against
the dollar on the first trading day of
March with a jump of nearly 1.5 per cent
at the day’s high. In one week, the euro
has climbed more than 3.5 per cent to
approach its strongest levels of the year.
The shift validates recent analysis
suggesting that, due to its rock-bottom
interest rates, the euro is an increasingly
popular currency to sell in favour of
higher yielding bets elsewhere.
When market conditions sour and
those bets are closed, traders effectively
buy back euros and cause the currency
to climb. The coronavirus outbreak has
provided a trigger for those more risk-
seeking bets to fold, according to James

Malcolm, head of FX strategy at UBS.

Up to the start of last week, investors

had been heavily selling the euro to buy

other currencies, Mr Malcom said,

pushing the level of negative bets on the

European currency to record levels.

“There were twice as many negative

bets on the euro than at the height of the

eurozone crisis,” he said.

Investors are now in full reverse,

pushing up the price of the currency in

the process. The changing role of the

euro has made it more prone to grinding

lower in normal times but popping

sharply higher when uncertainty rises.

George Saravelos, head of currency

research at Deutsche Bank, said the

euro would likely be trading at around

$1.17 if it were not for the weight of

speculative bets against the currency.

“A move higher does not require buy-

ing of European assets but merely an

unwind of [existing positions],” he said.

Another support for the euro comes

from the interest rate outlook. After the

sell-off in equity markets over the past

week, several central banks rushed to

reassure investors, stirring expectations

that interest rate cuts could be near.

Investors are pricing in two rate cuts

in the US this year with analysts noting

the first may come as soon as this month.

The European Central Bank has stressed

the need for “cool heads”, downplaying

the chance of imminent action.

This shift in rate expectations makes

the euro more attractive because the

gap in interest rates between the US and

the eurozone will probably narrow.

Kit Juckes, Société Générale strate-

gist, said the euro was still significantly

undervalued against the dollar, which is

adding to the speed of appreciation.

Currencies

Euro rallies for sixth consecutive day

after traders unwind negative bets

C O L BY S M I T H— N E W YO R K

JO E R E N N I S O N— LO N D O N

The 10-year US Treasury yield slid

towards 1 per cent for the first time as

investors sought haven assets during

the deepening coronavirus crisis and

placed bets on monetary policy

supporttosoothesomeoftheblow.

The yield on the benchmark US govern-

ment bond dropped to a low of 1.03 per

cent yesterday before edging back up to

1.09 per cent.

Other US government bond yields

were also in freefall with the two-year

yield dropping almost 0.17 percentage

points to 0.74 per cent in the biggest

one-day fall since March 2009.

The 10-year yield is among the most

important benchmarks in global

finance, underpinning borrowing and

savings rates around the world.

Seema Shah, chief strategist at Princi-

pal Global Investors said 1 per cent is a

“mental line in the sand”.

“Once the 1 per cent level is passed,

you could see a bigger move lower as

people start to lose confidence in the

economic outlook,” she said. “People

have been talking about negative rates

in the US and, at the beginning of the

year, it seemed unlikely but it has

started to become part of the normal

conversation.”

The moves lower reflected fears over

slowing global growth and solidifying

expectations that the US Federal

Reserve will be forced to cut interest

rates in an attempt to support financial

markets and soften the economic blow.

The benchmark S&P 500 equity index

has lost more than 10 per cent since

coronavirus concerns intensified at the

beginning of last week.

Futures markets are pricing in at least

one quarter-point cut in the Fed’s target

interest rate when the central bank

meets this month with some investors

betting it could cut rates by half a point

for the first time since December 2008.

Ryan Wang, US economist at HSBC,

said he expects the Fed to slash its

benchmark policy rate even further by

June by a cumulative 0.75 percentage

points.

Expectations of policy action were

entrenched by a deep “inversion” yes-

terday between the three-month Treas-

ury yield and the two-year yield.

The three-month yield stood at 1.14

per cent, down from over 1.5 per cent at

the beginning of last week. With the two-

year more than 0.3 percentage points

lower, the curve reinforced expectations

of interest rate cuts on the horizon.

“It’s inevitable there will be some kind

of move not just from the Fed but all

central banks, especially now that mar-

kets are demanding it,” said Ms Shah.

But she cautioned that easing mone-

tary policy may have a limited impact in

the face of the intensifying coronavirus

outbreak, which has now claimed more

than 3,000 lives and infected nearly

90,000 globally, according to a database

from Johns Hopkins University.

“Central banks can’t do much. They

may be able to provide a bit of support

and ease liquidity conditions but they

are limited,” said Ms Shah. “We could see

a greater impact on markets if we saw a

fiscal response from governments.”

Fixed income

Benchmark US bond yields slide near

to 1% as rate rise expectations grow

‘Once 1 per cent is passed,

you could see a bigger

move lower as people

start to lose confidence’

The virusoutbreak has triggered

risk-seeking bets on the euro to fold

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K AT I E M A RT I N , O L A F STO R B E C K ,
L AU R A N O O N A N A N D DAV I D K E O H A N E

Europe’s banks and asset managers are
stepping up preparations to keep teams
trading in the face of the coronavirus
outbreak with several standing ready to
shift staff to off-site locations.
After a week of severe ructions in
equities, bonds and commodities
caused by the global economic threat of
Covid-19, banks and regulators are
working to ensure that markets con-
tinue to function without disruption to
operations.
The Bank of England said it was work-
ing with the Treasury, the Financial
Conduct Authority, and its international
partners “to ensure all necessary steps
are taken to protect financial and
monetary stability” — comments that
also reflect growing expectations that
central banks could cut interest rates or
use other tools to try to soften the eco-
nomic impact of the virus.
As the highly infectious virus spreads,
the ability to sustain large, open-plan
trading floors, which often house
hundreds of traders and analysts in
proximity to one another, is increas-
ingly under threat.
UK regulators are aware of the risk
posed to market stability in an extreme
scenario and are in regular contact with
banks to ensure they are ready to acti-
vate contingency plans, people familiar
with the matter said.
“We can’t have disruption to markets
should this spread further,” one of these
people said.

The Financial Conduct Authority, the

UK’s financial watchdog, said it was

“working closely with the financial serv-

ices sector to ensure it is responding

effectively to the outbreak”.

“We expect all firms to have contin-

gency plans in place to deal with major

events so that they are able to continue

operating effectively,” the regulator

said.

Global stock markets fell almost 13

per cent last week after the virus spread

deeper into Italy and South Korea and

began to take hold in the US. Despite the

dent to portfolios, however, trading

systems operated smoothly.

For banks, sending staff either home

or to off-site bases for work is a difficult

but not insurmountable task. Some

banks already give staff mobile phones

with recorded lines, which are essential

for monitoring conversations to help fix

errors or to minimise risks of traders

sharing sensitive information.

Electronic trading applications, such

as those on Bloomberg terminals, are

sometimes available remotely and

dedicated disaster recovery sites are

designed to operate on a par with core

facilities.

Complications set in if banks need to

have certain staff work away from

disaster recovery centres, for example

at home.

AFME, a lobby group for European

financial institutions, is “looking into”

whether key national regulators would

exempt banks from rules requiring cer-

tain activities to be carried out on

premises, a person familiar with those

efforts said.

Banks and investors know that send-

ing people to work in remote locations

in satellite towns around London would

inject inefficiencies into the working of

their trading desks.

None has yet activated plans to take

that step but several people familiar

with banks’ plans said they were intend-

ing to look more closely at their proc-

esses in the coming week.

A person familiar with the matter

said thatDeutsche Bankhad already

implemented a “split operations”

scheme for some of its Asian operations

with key trading teams split in two

to work from separate locations.

“Deutsche Bank is taking active steps to

protect staff and clients and ensure

continuity of operations across all our

businesses,” the lender said in a

statement.

HSBCsaid it was able to “support our

clients from multiple sites”, adding: “We

have well practised contingency meas-

ures that ensure critical processes con-

tinue to be maintained.”

One large UK-based investment

house has implemented an office

clampdown, isolating offices and stop-

ping movement between them to try to

keep locations operational.

A person briefed on the arrangements

there described this as the outcome of

“gold-level crisis planning”.

“We double-checked our existing

business continuity plans last week to

make sure everything stands ready,”

another senior manager of a large

European asset manager told the Finan-

cial Times.

Should the situation escalate, the firm

will split its trading teams into two

groups with one of them working from a

secondary location. “Both teams would

swap their locations on a weekly basis

while the offices would be deep cleaned

in between.”

Planning has also intensified at the

biggest French banks, where some are

waiting for approval from regulators to

allow traders to work from home.

Banks there also intend to first split

trading staff into back-up and standard

locations while some trading could also

shift into less affected countries.

Most banks and investment houses

have already restricted international

travel and relied on the greater use of

video conferencing in an effort to shield

staff from infection.

Additional reporting by Tabby Kinder

BoE works with international

partners to ‘protect financial

and monetary stability’

‘We can’t

have

disruption

to markets

should

this

spread

further’

Face masks are

becoming a

familiar sight on

London public

transport as

cases of the

coronavirus rise

in the UK

Yui Mok/PA

Cross asset.Contingency plans

Banks prepare off-site trading

in response to virus threat

SA M J O N E S— Z U R I C H

The Swiss National Bank announced an

annual profit of SFr48.9bn ($50.2bn)

yesterday, powered by a huge gain in

foreign equity investments, including

Apple andAmazon, and a holding of

more than 1,000 tonnes of gold.

The windfall makes the central bank

one of the most successful investors in

2019 — outperforming many of the sav-

viest traders in the hedge fund and asset

management industries.

In total, the SNB gained SFr33bn last

year from rising global equity markets,

it said in a statement yesterday.

The SNB also said its profit from

foreign currency positions, which

include stocks, amounted to SFr40.3bn

while it also recorded a valuation gain of

SFr6.9bn on its gold holdings.

The profit on its Swiss franc positions

was much smaller at SFr2.1bn.

Swiss monetary policymakers have

accumulated huge amounts of foreign

currency assets as part of a battle to hold

down the value of the franc.

Choppy global markets and mounting

political risks worldwide have under-

scored Switzerland’s reputation as a

haven for the super-wealthy and the

risk-averse, putting significant upward

pressure on the franc as a result.

The SNB is five years into an unprece-

dented fiscal experiment in negative

interest rates. The benchmark Swiss

rate — currently held at minus 0.75 per

cent — is the lowest in the world.

Though this year’s bumper payout is a

consequence of monetary policy and is

not part of any profit-seeking agenda, its

size has increased the political pressure

from Bern for the SNB to share the fruits

of its success.

The federal government and cantons

will now receive SFr4bn from the SNB —

double the amount previously paid out

— as part of a special agreement struck

to cover 2019 and 2020.

The largest part of last year’s profits

came from investments in foreign equi-

ties, principally in the US.

Included in the SNB’s portfolio at the

end of December, according to filings

with the Securities and Exchange Com-

mission, was a $4.2bn position in Apple,

$3.6bn inMicrosoft, $2.4bn inAmazon

and $1.6bn inFacebook.

Policymakers at the SNB have so far

resisted most efforts to distribute a

greater portion of gains linked to its

holdings.

They argue that the bank’s primary

concern must be the effective pursuit of

monetary objectives and that outsized

gains in any given year could easily be

matched under different circumstances

by significant losses.

At the heart of the SNB’s concerns is

the belief that any appreciation in the

value of the franc — which could be large

in the absence of SNB controls — would

cause damage to the Swiss economy.

Asset management

Wall Street

stock gains

lift SNB profit

to $50bn

Included in the SNB’s

portfolio was a $4.2bn

position in Apple and

$3.6bn in Microsoft

Global stocks tumble after coronavirus spreads beyond China

FTSE All-World index

Source: Bloomberg











Jan  Mar

MARCH 3 2020 Section:Markets Time: 2/3/2020 - 19: 14 User: stephen.smith Page Name: MARKETS1, Part,Page,Edition: LON, 23, 1