20 ★ Wednesday19 February 2020
Guy Stear
Markets Insight
Emerson Electricfaded after RBC Capital
Markets downgraded to “sector perform”
on fading hopes of a break-up.
At an analyst meeting last week,
Emerson management indicated that cost
cuts were the priority and thatportfolio
reshaping would only happen if paired
with a big strategic acquisition, RBC said.
A profit warning sunkConagra Brands
with the owner of Chef Boyardee and
Reddi-wip foods cutting 2020 organic
sales and margin guidance to reflect soft
retail sales through January.
The unscheduled update, which
followed upbeat guidance in mid-
December, raised further doubts about
whether Conagra’s 2023 targets were
realistic.
Krogerrose on the back of news late
last week thatBerkshire Hathawaywas
holding a stake in the grocer with a value
of about $549m.
Asset managersFranklin Resources
andLegg Masongained after the former
agreed to buy the latter for $4.5bn.
Appleand its suppliers weakened on
its warning that the coronavirus was
slowing iPhone production and deferring
sales in China.
Qualcomm,Texas Instruments,
Microchip Technology,Lam Research
andQorvoall were hit.Bryce Elder
Wall Street Eurozone London
UBI Bancaled the European lenders
sharply higher afterIntesa Sanpaolo
launched an unsolicited all-share offer,
which raised sector consolidation hopes.
Intesa’s offer “is the first of its type and
size for many years”, said Commerzbank,
which argued that Germany and Italy had
the most to gain fromconsolidation in a
sector where hostile bids have been rare.
“That Intesa chose to surprise UBI and
the market this way indicates a lack of
interest from any such discussions and a
sense that doing nothing from a strategic
perspective was no longer acceptable,”
Commerzbanksaid.
Kerry Groupof Ireland rose after full-
year results met consensus forecasts.
The food supplement maker guided for
constant currency earnings per share
growth of between 5 and 9 per cent for
2020, which matched forecasts at the top
end in spite of coronavirus disruption in
the first quarter.
Worldline, the French payments group,
gained on an upgrade to “buy” from UBS.
The broker valued Worldline’s terminals
business at between €2.2bn and €3.4bn
with a valuation at the upper end likely in
the event of a trade sale.
Vopak, the Dutch fuel storage
company, drifted lower after Credit Suisse
advised taking profit.Bryce Elder
Weir Groupwas under pressure as
analysts urged caution ahead of the
pumpmaker’s full-year results due next
week.
Weak demand for mining equipment, a
further deterioration in the outlook for oil
and gas demand and currency headwinds
suggest 2020 consensus forecasts need
to move lower, said JPMorgan Cazenove.
Vodafonegained after the Betaville
website picked up on rumours that a
“mystery company” was weighing up
making a takeover offer.
People familiar with Vodafone said they
knew nothing of potential bid interest.
HSBCled the FTSE 100 fallers after the
bank suspended share buybacks for the
next two years to pay for a restructuring.
The lender also lowered guidance for
Coca-Cola HBCretreated after
Citigroup advised taking profit.
InterContinental Hotelsreversed an
opening loss to end higher after
management used a post-results
conference call to play down the likely
impact to revenue from the coronavirus.
IQE, the semiconductor wafer maker,
was the worst performer among UK
technology stocks in reaction toApple’s
warning of production bottlenecks and
weak iPhone sales in China.Bryce Elder
3 Apple’s warning over the coronavirus
sends tech stocks sharply lower
3 Drop in investor sentiment weighs on
German equities
3 Gold breaches $1,600 for only the
second time since 2013
Global stocks retreated yesterday after
Appleissued a sales warning that
brought home to investors the economic
damage being wrought by the
coronavirus outbreak.
The tech giant said “worldwide iPhone
supply will be temporarily constrained”
due to the epidemic and factories run by
its suppliers in China were resuming work
more slowly than expected.
“The warning from a member of the
$1tndollar tech club is as big a red flag as
any for a market priced for perfection,”
said Eleanor Creagh, Australian market
strategist at Saxo Bank.
“China’s importance within intertwined
global supply chains and
interdependencies between component
makers mean one missing part or stalled
factory can create bottlenecks down a
whole production line,” she added.
Shares in Apple sank more than 2 per
cent yesterday alongside a broader slide
in tech stocks.
Hong Kong-listedAAC Technologies, a
maker of acoustic parts for Apple, fell 3.
per cent while iPhone assemblerHon Hai
Precision, better known as Foxconn,
retreated 0.6 per cent.
The Philadelphia Semiconductor index,
which includes companies with strong
trading ties to China, tumbled 1.7 per
cent, underperforming the wider S&P
500, which was down 0.6 per cent by
midday.
The tech-heavy Nasdaq Composite fell
0.4 per cent while the Dow Jones
Industrial Average slid 0.9 per cent.
Chipmakers also lagged behind the
broader market across the Atlantic where
the tech sector fell 0.7 per cent against a
0.4 per cent slide for the region-wide
Stoxx Europe 600.
Frankfurt’s Xetra Dax fell 0.8 per cent
after a closely watched survey revealed
that investor sentiment in Germany had
dropped sharply in February owing to
exporters’ concerns about the
coronavirus.
Oil was caught up in the retreat with
Brent crude, the global benchmark, falling
0.8 per cent to $57.24 a barrel.
The risk-off tone to the session led to
rallies in haven assets such as gold, which
rose 1.4 per cent to breach $1,600 an
ounce for only the second time since
March 2013.Ray Douglas
What you need to know
Apple’s sales warning hits chipmakers
Source: Bloomberg
Indices rebased
Wed Thu Fri Tue
S&P
Philadelphia SemiconductorThe 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 3355.82 1677.46 23193.80 7382.01 2984.97 113760.
% change on day -0.72 -0.37 -1.40 -0.69 0.05 -1.
Currency $ index (DXY) $ per € Yen per $ $ per £ Rmb per $ Real per $
Level 99.292 1.082 109.810 1.304 7.005 4.
% change on day 0.292 -0.092 -0.132 0.231 0.348 0.
Govt. bonds 10-year Treasury 10-year Bund 10-year JGB 10-year Gilt 10-year bond 10-year bond
Yield 1.545 -0.409 -0.055 0.631 2.901 6.
Basis point change on day -4.170 -0.700 -1.220 -3.200 0.600 5.
World index, CommodsFTSE All-World Oil - Brent Oil - WTI Gold Silver Metals (LMEX)
Level 380.03 57.21 51.90 1580.80 17.80 2691.
% change on day -0.68 -0.57 -0.73 -0.04 0.54 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
||||||| ||||||||| ||||
Dec 2020 Feb
3120
3200
3280
3360
3440
||||||||||||||||||||
Dec 2020 Feb
1600
1640
1680
1720
|||||| |||||||| ||||||
Dec 2020 Feb
7200
7360
7520
7680
Biggest movers
% US Eurozone UK
Ups
Leidos Holdings 9.
Advance Auto Parts 5.
Franklin Resources 5.
Kroger Co (the) 4.
Newmont 3.
Kerry Grp 3.
Carrefour 3.
Coloplast 2.
Edf 2.
Intesa Sanpaolo 2.
Nmc Health 5.
Vodafone 2.
United Utilities 2.
Intercontinental Hotels 2.
Hikma Pharmaceuticals 1.
%
Downs
Conagra Brands -7.
Centurylink -5.
Mohawk Industries -4.
Vulcan Materials (holding ) -4.
Whirlpool -4.
Prices taken at 17:00 GMT
Renault -6.
Thyssenkrupp -5.
Aegon -3.
Alstom -3.
Vopak -3.
Based on the constituents of the FTSE Eurofirst 300 Eurozone
Hsbc Holdings -6.
Glencore -4.
Auto Trader -4.
Antofagasta -3.
Smurfit Kappa -3.
All data provided by Morningstar unless otherwise noted.
C
orporate bonds can be
boring. The period between
2004 and 2006 wasparticu-
larly dull. Euro-denomi-
nated investment grade
credit spreads — the extra yield over
benchmark government bonds — stuck
inarangeofjust0.32percentagepoints.
The credit spread of the index began
and ended the period at the same level.
In 2020, many credit investors seem to
thinkthistediouspatternhasreturned.
Corporate bond spreads are already
close to the floor of their trading range
over the past 10 years and there is noth-
ing on the immediate horizon to make
themwiden.
US and European growth is plodding
along and vigilant central banks are in
the wings, ready to quash volatility as
soonasitappears.
Yet such complacency is misplaced.
Credit spreads are unlikely to move
sideways for long because credit spread
cycles have become much more volatile
sincetheglobalfinancialcrisis.
In the 30 years before the 2008 crisis,
a typical credit spread cycle lasted eight
years. After widening for 18 months,
spreads tended to tighten for two years
and then move sideways in a period of
low volatility that could last for up to
fiveyears.
But in the past decade,the cycle has
shortened. The bear markets of 2007,
2011, 2015 and 2018 were swiftly fol-
lowed by bull markets while periods of
sidewaystradinghavebecomeshorter.
To understand why credit cycles have
shrunk, investors need to go backto the
dollar-denominated credit markets of
the 1970s. Like Europe, the USexperi-
enced long, drawn-out cycles in the
1980sand1990s.
But in the 1970s,US credit cycles were
short and sharp — much like the cycles
of the past 10 years. Why have credit
cycles returned to the patterns of the
1970s? Beards may be back along with
flared trousers but the more important
parallelfor investors lies in the level of
governmentbondyields.
Nominal yields were high in that
period and have been low or even nega-
tive in the past decade; yet in both peri-
ods real yields were very low. Between
1973 and the end of 1979, real US bond
yields — as measured by nominal 10-
year yields, minus the spot annual infla-
tionrate—averagedminus0.3percent.
From 1980 to 2010, real yields roseto
an average of 3.5 per cent; in the past 10
yearsithasfallenbackto0.6percent.
Real bond yields fell in both periods
because of central banks. In the past
decade, central banks depressed nomi-
nal yields below inflation rates by cut-
ting short-term interest rates and buy-
ing bonds through quantitative easing.
In the 1970s, governments did the same
thingbycappingnominalbondyields.
But why should low or negative real
bond yields make credit spreads more
volatile?
Low real yields increase the propen-
sity of companies to borrow. When
nominalyieldsareatorclosetothelevel
of inflation, companies have to generate
only small real returns to cover borrow-
ingcosts.Borrowingsurgesasaresult.
Although more leveraged balance
sheets can be financed when yields are
low, they do leave companies more vul-
nerable when the economy turns down.
At the same time, low real yields also
influence investor behaviour. Many of
the buyers of bonds on both sides of the
Atlantic are purchasing fixed income
assetstofinancetheirliabilities.
Insurance companies buy bonds to
finance life insurance contracts while
pension funds invest to provide retire-
ment benefits. Both need positive real
yields to generate the payments they
havepromisedtheirinvestors.
Therefore,asrealyieldsinthegovern-
ment bond market fall, these investors
moveintoriskierassets—suchascorpo-
ratebonds—tomeettheirneeds.
Increased demand for borrowing
from companies and increased demand
for assets from investors may seem well
matched. But when supply and demand
arefinelybalanced,smallchangesinthe
environment can lead to big changes in
creditspreads.
Investorsknowhighlyleveragedcom-
panies are vulnerable so, as soon as the
outlook worsens, they head for the exit.
As the environment begins to improve,
theyflockbackjustasfasttogettheextra
yieldthatcorporatebondsprovide.
Instead of reducing the volatility of
credit spreads, central bank policy is
probably increasing it. The short credit
spreads of the 1970s in the US returned
to the longer, more normal cycles of the
1980s and 1990s only when the then-
Federal Reserve chairman Paul Volcker
hiked interest rates and made US yields
positiveoncemore.
Global central banks still seem far
from their Volcker moment. And as a
result, 2020 could be a much more
exciting year for global credit markets
thaninvestorsrealise.
Guy Stear is head of fixed income research
at Société Générale
Bewarecomplacency
ascorporatebond
dramacomescloser
Beards may be back along
with flared trousers but
the more important 1970s
parallellies in bond yields
FEBRUARY 19 2020 Section:Markets Time: 18/2/2020-18:40 User:stephen.smith Page Name:MARKETS2, Part,Page,Edition:EUR, 20 , 1