24 ★ Tuesday 3 March 2020

Karen Petrou

Markets Insight

Applerose on the back of an upgrade to
“outperform” from Oppenheimer.
The broker’s channel checks suggested
that Apple had stronger resistance than
competitors to supply-chain disruption
and weaker consumer confidence, it said.
“Apple has mastered the art to turn
technology into deeply personal and
indispensable everyday objects from
phones to Watch to AirPods,” said
Oppenheimer. “We believe Apple
products and services will prove more
resilient than [competitor] products in
uncertain times.”
Another day of coronavirus headlines
drove the wider market.
Clorox, the bleach maker, and retailers
such asCostco andWalmartwere in
demand on reports of bulk buying while
travel stocks such asAmerican Airlines
andUnited Airlinesled the fallers.
Norwegian Cruise Line andCarnival
slid after Japanese peer Luminous
Cruising filed for bankruptcy.
Twitterrose on the back of activist
investor Elliott Management buying a
stake and lobbying for the removal of
Jack Dorseyas chief executive.
Verizon Communicationsrose after
Cowen & Co turned positive on valuation
grounds, calling the telecoms group a
haven in risk-off markets.Bryce Elder

Wall Street Eurozone London

SEScrashed to a 15-year low after full-

year results from the satellite operator

came with a profit warning and a halving

of its dividend.

Flatlining demand for video and a

deterioration of its networks business

meant SES cut sales and operating

earnings targets to as much as 10 per

cent below consensus. The dividend was

also sacrificed to fund investment while

defending its investment grade rating.

“Satellite companies do not have a

great history of cutting expectations and

then delivering on the new lower

numbers, so we do not think that

investors will necessarily be able to view

this as an end to forecast downgrades,”

said Barclays.

European travel stocks were yet to find

a floor, withLufthansa andAir France-

KLMboth hitting three-year lows while

duty-free operatorDufrydropped to its

worst level in a decade.

MTU Aero Enginesof Germany

retreated after Vertical Research took the

engineer off its “buy” list, citing the

depressed outlook for aerospace.

Austrian real estate companies

Immofinanz andSImmosurged on

merger speculation in response to stake

building by corporate raiders Ronny Pecik

and Peter Korbacka.Bryce Elder

J Sainsbury andWm Morrisonjumped

after Bernstein Research said the

groceries sector looked oversold on

coronavirus concerns.

While contingency measures might

mean supermarket profitability takes a

temporary hit, valuations have fallen back

to levels last seen when the sector first

faced competition from discount chains

that went on to hit 60 per cent of their

earnings, Bernstein said.

It advised buying Sainsbury’s and

Morrisons for their “relative operational

simplicity” and said Tesco had resilience

thanks to its Booker wholesale chain.

Rentokilhit a record high, helped by

“buy” advice and forecast upgrades from

brokers including Jefferies.

Results last week from Rentokil

demonstrated that its acquisition of

Florida Pest Control was a “game

changer” for profit margins, Jefferies said.

London Stock Exchangegained after

Exane BNP Paribas repeated

“outperform” advice and said investors

should be relieved that it still intended to

file its proposed acquisition of Refinitiv

with the European Commission in March.

Micro Focusweakened after the

software group said it was postponing a

debt refinancing due to “adverse market

conditions”.Bryce Elder

3 Big gains for Wall Street as investors
weigh signs of central bank support
3 Italian equities plummet following
weak manufacturing data
3 US 10-year Treasury yields hit all-time
low amid haven buying

US stocks jumped as investors weighed
signs that leading central banks were
preparing to deliver monetary support in
an effort to soften the economic impact
of the global coronavirus outbreak.
The latest wave of buying came after
reports that finance ministers and central
bank governors from major economies
were planing to discuss their response to
the public health emergency.
But a cautious mood was still evident
yesterday with gains for traditional
havens. The yield on the 10-year US
Treasury fell 10 basis points to a record
low of 1.03 per cent. It later retraced some
of this slide to stand at 1.10 per cent.
Gold, another haven, advanced almost 1
per cent to $1,598 an ounce.
The S&P 500 rose more than 2 per cent
by midday for its first r ise in eight
sessions following a swift retreat that had
resulted in a nearly 13 per cent fall from
its mid-February record high.
The tech-heavy Nasdaq Composite
increased 2.5 per cent while the Dow
Jones Industrial Average climbed 2.8 per
cent, buoyed by a bounce back in Apple’s
stock price, which fell more than 15 per
cent last week.

Some European bourses also moved

back into positive territory. The broad

Stoxx Europe 600 rose 0.1 per cent while

Paris’s CAC 40 climbed 0.5 per cent and

London’s FTSE 100 gained 1.1 per cent.

But Italian stocks suffered a 1.4 per

cent fall following the release of economic

data showing that the nation had endured

its 17th consecutive monthly decline in

manufacturing activity in February.

The news stoked fears that Italy, which

is grappling with one of the largest

coronavirus outbreak outside Asia, was

on the cusp of recession.

The Italian government has announced

plans to inject €3.6bn into the economy

after it reported more than 1,600 cases of

the coronavirus and 34 deaths.

“We could be looking at a decline in

Italian GDP of almost 1.5 per cent in Q2

after a modest decline in Q1,” said

economists at Jefferies.

Asian stocks rallied with China’s CSI

3 00 index closing up 3.3 per cent for its

best one-day performance since May.

Brent crude, which sank below $50 a

barrel earlier in the session, climbed 5.3

per cent to $52.28 a barrel.Anna Gross

What you need to know

Weak manufacturing data pile pressure on virus-hit Italy

Indices rebased

Source: Bloomberg













Thu Fri Mon

Stoxx Europe 

FTSE MIB

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 3035.58 1469.19 21344.08 6654.89 2970.93 106213.49
% change on day 2.75 0.32 0.95 1.13 3.15 1.96
Currency $ index (DXY) $ per € Yen per $ $ per £ Rmb per $ Real per $
Level 97.567 1.113 107.925 1.275 6.958 4.493
% change on day -0.576 1.274 0.056 -0.157 -0.461 -0.414
Govt. bonds 10-year Treasury 10-year Bund 10-year JGB 10-year Gilt 10-year bond 10-year bond
Yield 1.091 -0.627 -0.141 0.404 2.763 6.493
Basis point change on day -7.030 -1.700 1.780 -3.500 0.500 -16.500
World index, CommodsFTSE All-World Oil - Brent Oil - WTI Gold Silver Metals (LMEX)
Level 344.68 52.00 46.95 1609.85 17.19 2606.90
% change on day 1.85 4.00 3.89 -2.55 -4.79 0.31
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

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

Jan 2020 Mar

2880

3040

3200

3360

3520

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

Jan 2020 Mar

1440

1520

1600

1680

1760

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

Jan 2020 Mar

6400

7040

7680

Biggest movers
% US Eurozone UK

Ups

Costco Wholesale 9.54

Twitter 8.75

Apple 7.08

Walmart 6.91

Clorox 6.83

Man 24.27

Seadrill 5.37

Grifols 4.66

Carrefour 4.12

Iberdrola 3.92

Hikma Pharmaceuticals 6.21
Rentokil Initial 6.03
Ocado 5.22
Morrison (wm) Supermarkets 5.17
Experian 4.48
%

Downs

Live Nation Entertainment -6.74

Norwegian Cruise Line Holdings Ltd -6.18

Chipotle Mexican Grill -3.80

Capri Holdings -3.14

Carnival -2.99

Prices taken at 17:00 GMT

Ses -30.08

Lufthansa -6.50

Randstad -5.22

Unicredit -4.40

Commerzbank -4.05

Based on the constituents of the FTSE Eurofirst 300 Eurozone

Int Consolidated Airlines S.a. -8.24

Carnival -4.19

Barclays -3.66

Whitbread -3.47

Easyjet -3.45

All data provided by Morningstar unless otherwise noted.

F

ederal Reserve chairman Jay

Powell cryptically assured

markets at the end of last week

that the US central bank

would do the “appropriate”

thing to counter Covid-19’s plague on

equity prices.

This is a carefully crafted promise of

nothing specific, ensuring that the Fed

can do anything it wants.

Even so, investors have taken it not

only as assurance that US short-term

interest rates will drop at least a full per-

centage point but also that the Fed will

expand its “whatever it takes” promise

for financial markets into a no-holds-

barred backstop for stocks.

If the Fed does step in, the dead-cat

bounce should not be mistaken for res-

urrected animal spirits. No amount of

rate cuts will cure a single coronavirus

patient, nor will anyone frightened of

illness decide to buy a new house, a car

or even a night out at a restaurant.

Markets that are priced for a rescue

ignore reality at great peril and central

banks that encourage them to do so run

even greater risks.

The first problem with a central bank

rate cut as a restorative is that it will

not work.

The reason is simple: central banks

have financial market weaponry and

coronavirus risk is not financial. It is, of

course, an initially biomedical risk that

is followed by risks of contagion —

literally — for the entire supply side of

the manufacturing and service sectors.

One reason markets flew so high late

last month was confidence that China

had Covid-19 under control. This was

not value-driven investing but simple

speculation. Rescuing speculators is not

what central banks can or should do.

It may now be true that Covid-19’s

consequences are becoming genuinely

macroeconomic, making central bank

intervention more sensible. However,

hope that the Fed or other central banks

can counter genuine commodity short-

ages and service-sector disruptions with

rate cuts is only hubris.

In 2008, a blitz from the Fed calmed

markets because the great financial

crisis was what its name signifies —

financial. But when the populace heads

for the hills, no amount of extra accom-

modative policy can coax it down.

Further, when central banks inter-

vene to cushion disruptions in supply

chains, they cease to be central banks

and become fiscal policy tsars. The mac-

roeconomic risk comes not from lack of

money but lack of treatment and cure.

The pandemic’s second-order effect —

supply-chain disruption — has nothing

to do with lack of cheap funds. Instead

the problem is fear, one that a lower

interest rate cannot calm.

Like the equity markets, bond and

commodity markets are reacting to

hard news. Central banks confident that

they can alter sentiment with a rate cut

have drunk too much of their own

spiked punch.

Long-established fiscal policy recog-

nises that fear of supply-chain shortages

is best solved with supply-chain infu-

sions. Historically, nations have thus

solved panic-driven commodity short-

ages with sovereign stockpiles such as

the US Strategic Petroleum Reserve, a

network of underground salt caverns at

four sites along the coastline of the Gulf

of Mexico.

The lack of any comparable facilities

for empty hotel rooms, missing car parts

and essential medicines cannot

be solved by monetary policy stimulus.

The Fed could go into the helicopter

money business, buying tonnes of cop-

per or other commodities or even buy-

ing out Disneyland for a day or two. That

might work, at least for a while. Even so,

pandemic quantitative easing is a novel

concept replete with problematic conse-

quences. What would the Fed buy and

why would it matter?

Buying more bonds might lower rates

to stimulate the economy, but an econ-

omy in quarantine cannot come out.

A precipitous rate cut, new-style QE

or some other market intervention of

the Fed’s devising share two flaws.

First, they will not work for long if the

virus lingers, because the crisis has

nothing to do with money, the Fed’s

stock-in-trade.

Second, even if the Fed finds a way of

putting a lasting floor under equity

prices that restores market confidence

and miraculously eases fears of a pan-

demic, US equity markets will have been

irreparably changed and for the worse.

After the financial crisis, central

banks talked a good game about ending

too-big-to-fail financial institutions.

If the Fed exercises its equity-pricing

put yet again, it will validate those press-

ing for a rate cut, secure in the belief that

moral hazard is the defining market

principle of the post-crisis era.

Too-big-to-fail banks will be suc-

ceeded by equity prices that are too high

to fall. That is a sure-fire way to create

crises yet unknown.

Karen Petrou is managing partner at Fed-

eral Financial Analytics in Washington DC

Investors expecting

virus rescue by Fed

ignore great risks

When the populace heads

for the hills, no amount

of extra accommodative

policy can coax it down

MARCH 3 2020 Section:Markets Time: 2/3/2020 - 19: 14 User: stephen.smith Page Name: MARKETS2, Part,Page,Edition: LON, 24, 1