12 ★ FTWeekend 21 March/22 March 20203 US volatility gauge climbs above peak
hit during 2008 financial crisis
3 Bounce back in oil prices helps
European energy companies rebound
3 Sterling recovers from 1980s low
ahead of UK chancellor’s work initiativeThere was a glimmer of hope yesterday
that the avalanche of policies aimed at
mitigating the economic damage being
wrought by the coronavirus crisis was
starting to calm jittery markets.
The S&P 500 tumbled 12 per cent on
Monday, then rose 6 per cent the
following day, before sliding back 5 per
cent on Wednesday.
Such swings were reflected in the Cboe
Vix, known as Wall Street’s fear gauge.
The measure of implied volatility in the
S&P 500 hit an all-time high on Monday,
surpassing the previous peak breached in
2008 during the financial crisis.
However, on Thursday the S&P 500
closed up 0.5 per cent and yesterday was
flat at midday in New York following a
barrage of central bank initiatives this
week designed to soften the blow of the
pandemic.
The European Central Bank, Federal
Reserve and Bank of England unveiled
measures ranging from buying hundreds
of billions of euros of bonds, boosting US
dollar funding and interest rate cuts.
“Sentiment seems to have improved
somewhat... but it might still be too
early to call it a comeback,” said analysts
at Rabobank. “The virus is likely to
dictate where markets will be headed,
and so far the situation is not under
control.”
A reminder of the precarious position
economies were in was revealed by a
sharp rise in US claims for unemploymentinsurance for the week that ended March- States such as Ohio and Pennsylvania
saw a surge in the number of people who
had been laid off in recent days.
“Today’s crisis is not your typical
situation,” said Eric Robertsen, head of
global macro strategy at Standard
Chartered. “The economic outlook looks
worse than many had assumed even a
few weeks ago.”
Despite stabilising yesterday the tech-
heavy Nasdaq Composite and the S&P
500 indices were on track to fall more
than 10 per cent for the week.
Across the Atlantic the Stoxx Europe
600 closed up 1.8 per cent, although the
region-wide benchmark was down more
than 2 per cent for the week. Energy
stocks were among the best-performing
companies yesterday, bouncing back
during a week in which oil prices fell to a
17-year low.
The pressures of reduced demand and
a sector price war continued to rattle
investors. Earlier this week Brent crude
slid more than 12 per cent to $25 a barrel.
However, yesterday the global
benchmark was up to $28 a barrel while
West Texas Intermediate soared more
than 20 per cent on Thursday to leave
the US marker at $24 a barrel.
The pound, which this week fell to its
weakest levels since the 1980s against a
strengthening US dollar, climbed more
than 1 per cent yesterday to $1.
having been below $1.15. Sterling rose
ahead of an announcement by Rishi
Sunak, the UK chancellor, who said the
government would step in to cover the
cost of 80 per cent of the salary of
workers, or up to £2,500 per month, for
any employee who was furloughed rather
than made redundant during the public-
health crisis.Ray DouglasWhat you need to know
Wall Street’s fear gauge soars to all-time high
Cboe Vix indexSource: Refinitiv 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 2397.65 1151.37 16552.83 5190.78 2745.62 67932.
% change on day -0.49 1.66 -1.04 0.76 1.61 -0.
Currency $ index (DXY) $ per € Yen per $ $ per £ Rmb per $ Real per $
Level 101.908 1.069 111.340 1.174 7.066 5.
% change on day -0.824 -0.093 1.163 0.686 -0.353 -2.
Govt. bonds 10-year Treasury 10-year Bund 10-year JGB 10-year Gilt 10-year bond 10-year bond
Yield 0.942 -0.324 0.086 0.559 2.741 8.
Basis point change on day -17.430 -12.600 0.000 -16.000 -2.200 -16.
World index, CommodsFTSE All-World Oil - Brent Oil - WTI Gold Silver Metals (LMEX)
Level 267.52 28.49 24.95 1474.25 12.01 2318.
% change on day 0.40 1.75 -1.81 -1.60 -3.34 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| |||||| ||||||||| ||||
Jan 2020 Mar1920256032003840| |||||||||||||||||||
Jan 2020 Mar960128016001920| ||||| |||||||| ||||||
Jan 2020 Mar3840512064007680Biggest movers
% US Eurozone UKUpsMgm Resorts Int 25.
Ventas 25.
Carnival 23.
United Airlines Holdings 20.
Wynn Resorts 16.Natixis 31.
Klepierre 27.
Adp 22.
Omv 20.
Safran 19.Carnival 20.
Jd Sports Fashion 18.
Easyjet 18.
Intercontinental Hotels 15.
Aveva 14.
%DownsLoews -11.
Arconic -10.
Invesco Ltd -9.
Franklin Resources -9.
Dish Network -9.
Prices taken at 17:00 GMTSnam -8.
Norsk Hydro -6.
Terna -6.
Telefonica -5.
Caixabank -5.
Based on the constituents of the FTSE Eurofirst 300 EurozoneM&g -12.
Auto Trader -11.
Rightmove -11.
Schroders -8.
United Utilities -7.
All data provided by Morningstar unless otherwise noted.Robert Armstrong
On Wall Street
T
hisisahugeopportunityfor
the banks.” This comment,
from a fund manager, is the
most surprisingI have
heard since the start of the
Covid-19 outbreak. What was shocking
was not the callousness — investors are
paid to be callous. What was surprising
washisexplanation.
He does not think the banks will
scrape extraordinary profits from des-
perate borrowers. The opportunity is
“to prove how stable their businesses
actually are”. More than a decade on
from thefinancial crisis, markets still
demand a discount for bank shares,
fearing that horrors are hidden on the
balance sheet. Should the banks make it
through the coronavirus crisis, they will
have passed the ultimate test, and that
discountshoulddisappear.
Markets are not looking that far into
the future, of course. The shares of the
biggestUSbankshavedroppedbetween
athirdandahalfinthepastmonth.
Thisepicsell-offhastakenplacebefore
thebankshavestartedtofeeltheimpact.
Bankers all tell a similar story: as of the
start of this week, spending on credit
cards, delinquencies and requests for
forbearance were not far off normal lev-
els. Of course the bankers do not think
that this will continue. But we are still in
thecalmbeforethestorm.Theonelarge
financial company that did publicly
update he market this week —t Ameri-
can Express said that it still expected—
itsrevenuestoriseinthefirstquarter.
So bank shares are priced on guess-
work. There is much speculation about
where the first blow will fall. The focus
in the past few weeks has been on
revolving credit lines. Several compa-
nies in the hardest hit industries avehtapped their facilities, and the headline
numbers are large.AB InBevdrewa
$9bn revolver all the way down, for
ex ample,andCarnivalCruises ook$3bn.t
This means banks’ effective exposure
tocorporatedebtorsinvulnerableindus-
tr ies is rising. This increases the banks’
risk.Butitisimportanttobeclearabout
thetypeandscaleofthatrisk.
The drawdowns will not, in them-
selves, leave the banks undercapitalised
ordrainthemofliquidity.Non-financial
companies rated by S&P have $729bn in
available revolving credit lines. But the
four biggest banks in the country — rep-
resenting perhaps a third of theUSbanking system — have at least $140bn
each in tier 1 equity. Even a huge run of
defaults on revolvers would not, in
itself,poseasystemicrisk.
Similarly, the liquidity risk is limited.
Wheredoesthecashgowhenitisdrawn?
Often back into a bank — and often the
same bank from which it was borrowed.
If the money is spent instead, it gets
recycled back into the system. If one
particular bank gets more withdrawals
than deposits, theFederal Reserve has
made cheap liquidity available to banks
through its discount window. The Fed
has alsosaid n recent days that it “sup-i
portsfirmsthatchoosetousetheircapi-
talandliquiditybufferstolend.”
Therushtotaplinesisameasureofthe
dire situation of a few companies, and asign of acute nerves at many others. But
making a big deal of the credit lines as a
threattothebanksistoocleverbyhalf.It
speaks to the well-earned neuroses of
both investors and journalists, who
rememberhowbanks’hiddenexposures
to mortgage debt turned a house price
bubbleintoafinancialcalamity.
This time around, the problem is
unlikely to be risks concealed incom-
plex structures r hidden in the fineo
print of loan agreements.It will be sim-
pler. Banks lend people and companies
money. If the economy grinds to a halt
forhalfayearormore,thebanksarenot
going to be paid back. No liquidity
crunch, no satanically structured secu-
rities, no mismatch of short nd long-a
termfunding.Goodold“the oneym in’ta
coming ack”creditrisk.b
Markets are starting to recognise this.
Some of thestocks that have been hit
even harder than the big banks are the
specialty credit ard lenders, especiallyc
thosethatlendtolessaffluentborrowers
than Amex.Discover Financial, for
example, has lost more than 60 per cent
of its value in a month.Synchrony,
which issues store credit cards to the
likes of Old Navy, has dropped more
thanhalf.
Either the banks have enough capital
to absorb the inevitable credit losses to
come, or they do not. This will depend
on the duration of the crisis, and how
sensibly the banks have lent money in
the years leading up to this point. But if
they do emerge solvent when the econ-
omy begins to grow again, the sceptics
will indeed have been vanquished, and
bank investors will be positioned to
makeagreatdealofmoney.[email protected]We are about to find
out how astute the
big banks have been
If the economy grinds
to a halt for half a year
or more, they are notgoing to be paid back
MGM Resorts ed a rally among casinol
stocks after JPMorgan said the Macau
operators were offering deep value.
The sector sell-off implied normalised
earnings would be cut by 36 per cent
from 2019 levels, “which we view as
unnecessarily bearish given little to no
liquidity risk in the space”, it said.
Meanwhile, Canaccord Genuity saw
“extreme” trading volumes over thepast
two weeks as pointing to casino stocks
“being transferred from weak hands to
strong hands” and suggesting “an
intermediate-term price low is near”.
Travel stocks includingMarriott nda
United Airlines allied as governmentsr
began setting out their bailout proposals,
including a $58bn package from the US to
backstop loans in exchange for equity.
Mylan umped after saying it wouldj
restart US production of a generic malaria
drug that is being studied as a potential
treatment for coronavirus symptoms,
with supply expected to arrive by mid-
April.Teva, which said it was donating
more than 6m doses of the drug to US
hospitals, also climbed.
GenMark ose after US regulators gaver
emergencyapproval to its Covid-19 test.
AT&T etreated after cancelling a sharer
buyback, scrapping financial guidance
and saying the impact of the outbreak
could be material.Bryce ElderWall Street Eurozone London
Shares inWorldline f France jumpedo
after Barclays turned positive, which also
helped lift its acquisition targetIngenico.
Worldline’s 50-per-centplunge since
hitting a record high earlier this year “is
at odds with the defensive nature of its
payments business model and its broad
industry and geographic exposure”,
Barclays said. “We acknowledge that
investors are running from leverage and
unconsummated M&A, but we see
Worldline’s balance sheet as solid and the
Ingenico deal as highly likely to go
through.”
Osram ed the Stoxx 600 gainers afterl
AMS said it remained committed to
buying the light maker in the second
quarter and that the syndicate of banks
underwriting its rights issue had also
committed to backstopping the deal with
a bridging loan.
LVMH allied as analysts played downr
the chances of its Tiffany takeover
collapsing. Bernstein Research argued
that the strategic value of the deal was
justified by Tiffany’s status as the only
jewellery “mega-brand” to remain
independent.
Evolution Gaming, the Latvia-based
online casino operator, gained after
reporting strong trading and saying the
cancellation of sporting events meant it
was picking up customers.Bryce ElderCarnival nda InterContinental Hotels
bounced as trading updates from the
travel groups proved no worse than
anticipated.
While Carnival said first-quarter
earnings per share would be less than
half last year’s level, the cruise ship
operator also revealed that booking
volumes were up before March and
flagged that itcould access additional
liquidity by securitising several of its
ships. Barclays estimated that Carnival
could raise more than $10bn from ship
securitisations.
InterContinental posted a 60 per cent
slump in revenue per available room for
March and cancelled its dividend, but the
hotelier also revealed cost savings that
analysts said should help if banking
covenants needed renegotiated.
Magazine publisherFuture urged tos
the top of the FTSE 250 after saying it
should meet expectations for the half
year ending March, with strong trading at
its digital brands earlier in the period
offsetting recent event cancellations.
Rightmove umbled after warning thatt
it had to offer its advertisers deeper
discounts in a stalled property market.
Pubs groupJD Wetherspoon alliedr
after saying ithad “sufficient liquidity to
maintain operations at a substantially
lower level of sales”.Bryce ElderMARKETS & INVESTING
MARCH 21 2020 Section:Markets Time: 3/202020/ - 18:46 User:timothy.digby Page Name:MARKETS2, Part,Page,Edition:ASI , 12, 1