Tuesday4 February 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 pound fell on the first trading day
after the UK left the EU asinvestors
fretted about the outcome of this year’s
tradenegotiations.
Sterling was down as much as 1.6 per
cent against the dollar to $1.2986 and
also slipped against the euro after Prime
Minister Boris Johnson said the UK gov-
ernment was ready to walk away from
talks with the EU without a deal on a
future trading relationship.
The fall put the pound on course for
its biggest one-daydrop since the
December election.
Mr Johnson was due to begin negotia-
tions with EU chief Brexit negotiator
Michel Barnier in Brussels today ithw
further volatility expected in currency
markets as headlines emerge from the
talks.
The UK officially left the EU on Friday
evening but talks about the future
trading relationship between the two
parties will last at least until the end of
the year.
Neil Jones, head of foreign exchange
sales for financial institutions at Mizuho
Bank, said market concerns over a
“hard” Brexit — the UK leaving the EU’s
internal markets without a trade deal —
were coming to the fore again and
putting pressure on the pound.
“My sense is investor fears of a no-
deal scenario will resurface,” he said.
Brussels as already sent a stronglyh
wordedresponse to Mr Johnson’s com-
ments, with Mr Barnier saying the UK
would not be able to negotiate an exten-
sive trade deal if it insisted on divergingrule books. Mr Johnson said in his
speech that he envisaged a Canada-style
deal with the EU, which would allow the
UK to set separate rules from Europe.
Jeremy Stretch, a strategist at
Canadian bank CIBC, said in a note that
the UK’s determination to set its own
regulations meant the threat of a no-
deal outcome was “materially under-
priced”.
The tough line from Mr Johnson
risked compromising “an already tight
negotiating window”, he added.
The currency made sharp gains last
week after the Bank of England left its
key interest rateunchanged, despite
expectations from some investors that
policymakers would cut rates from 0.75
per cent.
James Binny, global head of currency
at State Street Global Advisors, said
that, while Brexit headlines would
probably continue to affect sterling in
the weeks ahead, the currency had more
room to appreciate than it had to
weaken.
He forecast a trading range for ster-
ling between$1.28 and $1.35. “I think I
would rather be long sterling than
short,” Mr Binny said.Currencies
Pound set for biggest fall since general
election after Brexit concerns resurface
H A R RY D E M P S E Y A N D DAV I D S H E P PA R DOpec and its allies are preparing emer-
gency cuts in oil production after the
crude price entered a bear market,
driven lower by the impact of the coro-
navirusoutbreakondemandinChina.Brent crude, the international bench-
mark, fell yesterday to as low as $54.71 a
barrel, down 3 per cent to its weakest
level in more than a year and taking
losses to more than 20 per cent since
early January — the definition of a bear
market.
The so-called Opec+ group, which
includes the core members of the oil
producers’ cartel and alliessuch as Rus-
sia, isconsidering ts response. Thei
group fears prices will keep slipping
unless it takes action to stem the fall.
The oil price has been hard hit by the
viral outbreak as traders fear that the
closure of major cities and flight routes
in China will lead to a direct hit on con-
sumption. The country is second only to
the US in oil use.
Opec+ nations are due to assess the
situation at technical meetingstoday
and tomorrow. Talks will focus on
whether removing 500,000 barrels aday of output will be enough to prop up
the market, according to people briefed
on the discussions.
No deal has yet been agreed. Some
members think more time is needed to
understand the impact of the virus on
demand, according to those briefed.
Ministers for the countries were origi-
nally due to meet in early March but are
expected to convene later this month.
Any cuts would add tothose negoti-ated n December when the oil produc-i
ers agreed to remove a further
500,000 b/d until July, taking total pro-
duction cuts to around 1.7m b/d or just
under 2 per cent of global demand.
Analysts at Citi said demand for oil
could be reduced by more than 1m b/d
in the first three months of 2020 due to
coronavirus, which would amount to a
larger hit to the market than Sars in
2003.The bank has cut its price forecast for
the second quarter by $18 to just $50 a
barrel.
The structure of the Brent market has
also weakened dramatically in recent
days. Yesterday it moved intocontango
— where contracts for delivery in the
near future start trading at a discount to
those for delivery in later months, due
to the softness of demand.
Parts of China are entering a near-
total lockdown in an attempt to prevent
the transmission of the deadly virus.
Authorities have imposed a travel ban
on more than 40m people while retail-
ers such asApple ave closed storesh.
The threat to demand has come at a
bad time for an oil industry already
under pressure by investors to do more
to tackle climate change.
ExxonMobil, whichreported eakerw
than expected annual results on Friday,
was downgraded by a number of banks.
Prices for liquefied natural gas have
also fallen dramatically. The key
marker for Japan and Korea, known as
JKM, fell to a record low of $3.512 per
million British thermal units yesterday,
according to S&P Global Platts, a price
assessment agency.Commodities
Brent crude slides into bear territory as
virus fears trigger moves for output cut
The threat to demand has
come at a bad time for an
oil industry already underpressure on climate change
Sterling has retreated back to under
the $1.30 level against the dollarFastFT
Our global
team gives you
market-moving
news and views,
24 hours a day
ft.com/fastftE VA SZ A L AY A N D L AU R E N C E F L E TC H E R
Financial markets are cosying up once
more to crypto.
Institutions such as banks and asset
managers have long had a vexed rela-
tionship with cryptocurrencies, put off
by reputational risks, lack of regulation
and volatile returns. But a spell of better
performance is drawing them deeper in.
Dedicated cryptocurrency funds
returned more than 16 per cent in 2019,
according to aEurekahedge survey. In
contrast, traditional hedge fund strate-
gies yielded 10.4 per cent,said HFR.
“Bitcoin has a higher return on a one,
three and 10-year basis than any other
asset class,” said Steve Kurz, head of
asset management atGalaxy Digital, a
specialist cryptocurrency firm founded
by billionaire investorMike Novogratz,
once ofGoldman Sachs nda Fortress.
“When the returns are so high, investors
will have to pile in.”
But Wall Street has beenhurt before.
As the first rush in to cryptocurrencies
pushed bitcoin to above $20,000 in
2017, banks launched projects to
explore applications for blockchain, the
underlying technology.
Many of these projects stalled during
the crypto crash the following year.
Some big banks kept tabs on the area
— JPMorgan, for example,has launched
a digital coin (“JPM Coin”),which it
aims to offer for payments between its
customers. But, so far, none has set up a
dedicated desk to trade cryptocurren-
cies on behalf of clients.
As pricesrise — bitcoin was up 31 per
cent in January — interest is picking up
again.Deutsche Bank published a
report last month saying cryptocurren-
cies had “numerous advantages com-
pared to traditional assets, which could
lead more and more people to use
[them]”.
The German bank went even further,
saying lans by Chinese policymakersp
tolaunch adigital currency could
“erode the dollar’s primacy in the global
financial market”.
For specialised traders, crypto has
been a rich hunting ground.
In early 2018, one employee at a large
electronic trading firm said his com-
pany made as much as $8m a day from
hunting for price discrepancies in a
market where individual retail inves-
tors were betting against the most
sophisticated electronic trading firms
on hundreds of unregulated exchanges.
Crypto trading has been electronic
from the outset, making it a natural fit
for computer-driven firms that make
profits from buying and selling at speed.
Chicago-basedDRW, for example,established a dedicated crypto arm
called Cumberland; Mr Novogratz set
up Galaxy Digital; while proprietary
trading powerhouses such asJane
Street,Susquehanna,Flow Traders nda
Jump ll piled in.a
In response, CME Group launched the
firstregulated futures n a bitcoin indexo
in December 2017, making it possible to
make bets on falls in the currency for
the first time.
Until that point, family offices and
private individuals who were holding
bitcoin were lending these assets out to
hedge funds to make short bets and
charging handsomely for the privilege,
according toJan Strømme, chief execu-
tive ofAlphaplate, a specialist crypto
trading company.
But as these large trading firms
expanded in crypto, trading patterns
shifted too.
Instead of profiting from pricing inef-
ficiencies, big firms now look to supply
prices to exchanges where most retail
clients trade, and make money from the
spread between bids and offers.
On top of that, theseso-called liquid-ity providers negotiate deals for large
amounts of bitcoin privately among
themselves in the over-the-counter
market.
“There is a lot of fuss around bitcoin
but at the end of the day it’s just another
asset to trade,” saidMax Boonen, who
left his job as a fixed income trader at
Goldman in 2015 to start a crypto trad-
ing company calledB2C2.
He compares digital assets to
exchange traded funds, saying “they
will quickly become part of the invest-
ment landscape”.
Costs for processes such as custody
have come down, as have trading
spreads, although they are still high
compared with traditional markets.
Bitcoin has become similar to main-
stream investmentssuch as equities and
bonds, said Mr Boonen, though he
added that some institutionswere put
off by a lack of tools for mitigating coun-
terparty credit risk, such as having
trades settled by a clearing house.
Chris Zuehlke,Cumberland’s global
head,said itwas “only a matter of time
before traditional banks get involved,
perhaps as brokers between customers
and liquidity providers like us”.
Most market participants accept that
near-3,000 per cent average returns for
crypto hedge funds in 2017will not be
repeated. But opportunities remain.
Hedge fundTyr Capital made
double-digit gains last year, helped
bybetting that the prices of crypto-
currencies and their futures would
converge.
“As time goes by and more people like
us get involved, these things start to
disappear,” said Edouard Hindi, partner
at Mayfair-based Tyr. “But there’s a
good three to five years of very, very
profitable trading.”Robust performance by crypto
funds whets appetite atbanks
and asset management firms
‘There is a
lot of fussaround
bitcoinbut it’s just
anotherasset to
trade’The bitcoin
industry has
bounced back
from the price
setbacks of 2018
Lars Hagberg/AFP/GettyCrypto asset. trong returnsS
Big investors come back for
another bite at bitcoin
TO M M Y ST U B B I N GTO NEmerging market governments and
companies embarked on a record
borrowing spree in January, hoping to
lock in very low interest costs.
Issuers including Indonesia, Mexico
and Saudi Arabia sold $118bn of new
foreign currency debt in the first month
of 2020, up from $70bn in the same
period last year and an all-time high for
the month, according to Dealogic data.
The record borrowing — mostly in
dollars or euros — was broad-based
across Latin America, the Middle East
and Asia, according to Jean-Marc
Mercier, vice-chairman of capital
markets at HSBC.
“Looking at the low euro and dollar
yields, it’s very tempting [for borrow-
ers] take advantage of that,” he added.
Emerging market issuers typically
have to pay higher borrowing costs
when they issue debt in their local
currency because overseas investors
who buy the debt are exposed to
exchange rate risk.
Euro-denominated debt issuance
from emerging markets has been partic-
ularly strong, rising to $19bn from $7bn
a year ago.
Rising tension between the US and
Iran early in the month followed by the
outbreak ofcoronavirus n China didi
little to damp investor appetite. “Weeffectively had two mini ‘black swans’ in
January but both were disregarded by
the market,” Mr Mercier added. “If you
are an investor, you have cash to put
to work and you need yield in your
portfolio.”
The spread of coronavirus has hurt
riskier assetssuch as stocks over the
past week, driving investors into thesaf-
est government debt.
The rush for so-called haven assets
has caused the pool of negative-yielding
bonds around the world to swell to
nearly $14tn, from just above $11tn at
the start of the year.
“People are trying to figure out where
they can get yield and there aren’t really
many options out there,” said Uday
Patnaik, head of emerging market debt
at Legal & General Investment Manage-
ment.
Nearly $700m flowed into emerging
market debt funds last week, according
to data from Bank of America, marking
the seventh consecutive week of inflows
and bringing the total for the year so far
to $8.73bn.
Mr Patnaik said demand for higher
rated emerging world debt was likely to
remain intense, despite concerns about
the impact of coronavirus on China’s
economic growth.
He highlighted Saudi Arabia’s $5bn
sale of dollar bonds two weeks ago as
attractive to yield-hungry investors.
The new Saudi 35-year bond offered a
yield of 3.84 per cent, far above the rate
on long-dated US Treasuries.Fixed income
EM issuers set
January record
for euro and
dollar debt
‘We effectively had two
mini “black swans” in
January but both weredisregarded by the market’
‘Crypto winter’ ends as bitcoin prices recover
per bitcoinSource: Bloomberg FEBRUARY 4 2020 Section:Markets Time: 2/20203/ - 19:17 User:stephen.smith Page Name:MARKETS1, Part,Page,Edition:LON , 23, 1