Financial Times Europe - 20.03.2020

Friday 20 March 2020 ★ FINANCIAL TIMES 19

MARKETS & INVESTING

TO M M Y ST U B B I N GTO N

Eurozone government bond prices
soared yesterday after the European
Central Bank announced a €750bn
expansion of its debt-buying pro-
gramme in a bid to contain the market
falloutfromcoronavirus.

The dramatic rally pulled yields sharply
lower, particularly in Italy and Greece,
where borrowing costs had threatened
to spiral out of control. Italy’s 10-year
bond yield fell three-quarters of a per-
centage point to 1.52 per cent. In Greece,
whose bonds will be included in the
ECB’s asset purchases for the first time,
the 10-year yield fell from more than 4
per cent to 2.12 per cent.
The moves reverse a large part of a
bond sell-off over the past week,
although yields remain well above the
levels of two weeks ago. The ECB’s deci-
sion not to cut interest rates and to
expand asset purchases by just €120bn
at last Thursday’s regular meeting had
triggered the rise in yields, which accel-
erated after Christine Lagarde said it
was not the central bank’s job to “close
the spread” in bond markets — a refer-
ence to the extra yield on other euro-

zone countries’ bonds relative to Ger-

many’s.

With the introduction of the Pan-

demic Emergency Purchase Pro-

gramme, the ECB will now be pumping

about €117bn into bond markets each

month, split between government and

corporate debt.

“The ECB has delivered the shock-

and-awe policy announcement that was

lacking from its last meeting,” said

Rabobank strategist Richard McGuire.

The rise in Italian yields over the past

week had fuelled concerns that Rome

might struggle to raise cash to fund

emergency spending measures to tackle

the pandemic, or that investors would

begin to question the sustainability of

Italian finances.

“They eventually did the right thing,”

said Antoine Bouvet, a senior rates

strategist at ING. “If you look at policy

responses around the world, the ECB

had been the weakest link. But the mar-

ket has pushed them to rectify that.”

German bonds, which had been

caught up in the market sell-off in

recent days despite their haven status,

also joined in the rally, with 10-year

yields falling to minus 0.33 per cent

from minus 0.23 per cent.

Spreads across the eurozone tight-

ened, an indication that investors are

pricing in less risk to individual coun-

tries’ bonds. Spain’s 10-year yield sank

0.32 percentage points to 0.92 per cent.

“The size of the programme is what

we were looking for at the ECB last week

and follows a week of European bond

market dislocation,” said David Zahn at

Franklin Templeton. “This... should

be enough to help calm government

bond markets.”

Fixed income

Italy and Greece lead surge in eurozone

debt after ECB’s ‘shock and awe’ pledge

R I C H A R D M I L N E— O S LO

Norway’s central bank says it is weigh-

ingaveryrareinterventionincurrency

markets to prop up the krone, after the

currency plunged from what was

alreadyarecordlowagainstthedollar.

Norges Bank said yesterday that due to

the “historically large” currency swings

it was “continuously considering

whether there is a need to intervene in

the market by purchasing Norwegian

kroner”. It described the situation as

“extraordinary”.

The warning came after the currency

fell from NKr10.50 per US dollar on

Wednesday morning to NKr12.02 a day

later, bringing total falls since March 9

to about 30 per cent. The krone

regained some ground after the

announcement, strengthening to

NKr11.45 against the dollar.

The falls reflect a crisis for Norway on

two fronts: the coronavirus outbreak

and a plunge in oil prices. The unem-

ployment rate more than doubled in the

week to Tuesday and is set to rise fur-

ther next week, according to labour sta-

tistics.

Analysts were sceptical about the

prospect of Norges Bank stepping into

the market for the first time in decades

to stop the krone weakening further.

They said it had previously only made

verbal interventions when the currency

had strengthened too rapidly, viewing

weakness in previous crises as a wel-

come boost to competitiveness.

“We haven’t seen the central bank

step up to defend the krone,” said Erica

Blomgren Dalsto, chief Norway strate-

gist at lender SEB. “It’s very rare that

central banks that intervene to support

their own currencies are successful.

Their reserves are usually too small.”

She added that the central bank was

more likely attempting “to bring confi-

dence back into the market. I’m not sure

if they would actually intervene. Then

again, nothing is normal.”

Labour market statistics showed that

on Monday 27,000 Norwegians applied

for unemployment benefit, 64,000 on

Tuesday, and 41,000 on Wednesday.

The pre-crisis average was about 700 a

day.

This week the krone also fell to a

record low against the euro, dropping

from NKr11.57 to NKr13 in under 24

hours to yesterday morning, and fell to a

20-year low against the pound of

NKr13.85. After the central bank’s state-

ment, the currency strengthened to

NKr12.31 against the euro.

Ms Dalsto said: “It’s a combination of

collapse in oil price and risk sentiment.

That has triggered some forced selling of

Norwegian kroner due to equity portfo-

lios. The moves have been amplified

because liquidity is extremely thin. Eve-

rybody is trying to sell less liquid stuff to

get their hands on dollars.”

She added there were few natural

buyers of kroner with Norway’s trade

deficit rising.

However, the slide in the krone means

that Norway’s oil fund, the world’s larg-

est sovereign wealth fund, has gained on

its foreign-currency positions, meaning

more money is available for the govern-

ment to use in its budget under its

spending rule.

Currencies

Norway’s central bank considers rare

move to prop up krone against dollar

‘Everybody is trying to sell

less liquid stuff to get their

hands on dollars’

Blomgren Dalsto, strategist, SEB

InGreece the 10-year yield fell from

more than 4 per cent to 2.12 per cent

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R I C H A R D H E N D E R S O N— N E W YO R K

The US stock market could be losing one
of its most solid sources of support, as
big banks lead a wave of companies
putting share buybacks on hold.
Goldman Sachs andMorgan Stanley
were among eight banks this week to
announce a pause in share repurchases
until the third quarter, saying they
would use the funds instead “to provide
maximum support” to the coronavirus-
hit economy. Airlines including Ameri-
can andDeltahave also frozen buyback
programmes, blaming damage from the
viral outbreak.
Some analysts worry that by putting
programmes on hold, companies are
removing a pillar that the stock market
has come to depend on. Repurchases
have helped to power a record run in
share prices that hit a peak last month
before a rapid tumble into a bear mar-
ket.
Fewer buybacks “could amplify the
downturn”, said Lee Spelman, head of
US equity for JPMorgan Asset Manage-
ment.
“Corporate buyback programmes
have been the incremental buyer of
equities over the last 10 years — it’s been
an extremely important factor for the
market.”
Stock buybacks are neutral, in theory,
for a company’s value as every dollar
handed back to shareholders is a dollar
less on its balance sheet. However, a
reduction in the number of the shares
outstanding increases earnings per
share — which can often lift prices —

while also boosting pay for managers

with EPS-linked packages.

Many corporate boards also prefer

the flexibility of a buyback programme

over a fixed dividend, which is harder to

cut or even to keep flat. Investors, too,

can find buybacks more tax-efficient.

Over the years, the market has grown

increasingly reliant on solid bids from

companies themselves, which instruct

brokers to spend certain amounts on

open-market repurchases with fixed

periods. In 2019 the tally of buybacks

was $730bn, according to estimates

from S&P Dow Jones Indices, not far off

the record $806bn of 2018. Just a few

weeks ago it appeared as if 2020 could

set new highs but that prospect has now

vanished, as companies keep cash on

hand to navigate the slowdown.

In the energy sector, for example,

companies trying to manage the drop in

the oil price in addition to weakness in

demand, are looking to axe discretion-

ary spending.Occidental, a US oil group,

cut its dividend last week for the first

time since the Gulf war.

Already, the withdrawal of banks

deprives the market of some of its heavi-

est spenders.Bank of America, for

example, trailed onlyApple, a longtime

leader for buybacks, when it spent

$7.6bn on its own stock in the third

quarter of last year, the most recent for

which there is comprehensive data.

JPMorgan Chase,Wells Fargo andCiti-

group— also in that group of eight —

were all among the 10 biggest spenders

for the quarter.

“This removes the support we’ve

become addicted to,” said Howard Sil-

verblatt, senior index analyst at S&P

Dow Jones Indices. “This reduces the

buying and anything that reduces the

buying reduces price support, even

when it’s going down.”

Buybacks often taper in a bear mar-

ket. Before the previous global financial

crisis, buybacks for S&P 500 companies

hit $590bn in 2007, then a record, but

eased in 2008 and then dropped to just

$138bn in 2009.

“Companies got scared,” said Jim

Tierney, chief investment officer for

AllianceBernstein’s US growth equities

fund. This time round the pattern could

repeat, he said — especially for those

companies that had borrowed heavily to

sustain repurchase programmes. “Com-

panies will want to keep their dividend

intact, but rein in their buybacks.”

There could be more cuts in buybacks

if companies look to avail themselves of

various government support pro-

grammes aimed at lessening the impact

of coronavirus. This week Massachu-

setts senator Elizabeth Warren said any

recipient of taxpayer aid should be “per-

manently prohibited” from engaging in

buybacks. Another prominent Demo-

crat, Alexandria Ocasio-Cortez, cited a

Bloomberg analysis that found that the

top-10 US airlines — an industry that

this week lobbied for “immediate assist-

ance” — had spent 96 per cent of their

free cash flow over the past 10 years on

buying back stock.

Not all companies will pare buybacks.

Within the past couple of monthsAT&T,

Hilton Worldwide andOraclehave

authorised expansions of their pro-

grammes.

“This is one of those critical inflection

points,” said Susan Schmidt, head of US

equities for Aviva Investors Americas.

“If companies believe they have the

ongoing cash flow, many will believe

share repurchases are the best way of

using capital.”

But the longer the coronavirus crisis

lasts, and the longer there is a squeeze

on liquidity, the more likely that others

will trim repurchases.

“It’s not because I have a view of the

stock price, for God’s sake,” saidDoug

Parker,American Airlines’ chairman

and chief executive, discussing a sus-

pension of buybacks during a presenta-

tion last week to analysts.

Rather, he said: “It didn’t seem right.”

Delay to programmes raises

risk of amplifying downturn

by removing pillar of support

The longer

the virus

crisis lasts,

the more

likely that

others

will trim

repurchases

The withdrawal

of banks

deprives the

market of some

of its heaviest

spenders— Lucas

Jackson/Reuters

Equities.Repurchases

Banks poised to lead wave of US

groups putting buybacks on hold

DAV I D S H E P PA R D A N D L AU R E N C E

F L E TC H E R— LO N D O N

A trio of specialist energy hedge fund

managers in London is chalking up big

gains after betting on a plunge in the oil

price, which has been hammered by the

Saudi-Russia price war just as demand

collapsed due to the coronavirus pan-

demic.

Among the winners areDoug King,

head ofRCMA’s Merchant Commodity

Fund,Pierre Andurand, one of the

world’s best-known oil traders, andPer

Lekander atLansdowne Partners.

All three — among the last remaining

hedge fund speculators focusing on

these markets — have made strong

returns as the price of oil has tumbled,

down more than 60 per cent since the

turn of the year. On Wednesday Brent

crude sank below $25 a barrel for the

first time in 17 years.

Traders and analysts warn that oil

could have further to fall, even after the

price was cut in half this month. Predic-

tions are growing that crude could soon

trade in the teens or lower as the fallout

from the spread of the virus shakes the

world economy. Citi this week cut its

forecast for Brent to just $17 a barrel in

the second quarter.

Mr King, whose $165m fund came to

prominence in 2014 by calling the last

oil crash, has gained more than 25 per

cent year to date by betting against gaso-

line, which has fallen even faster than

crude in recent weeks.

“It is a dreadful situation that we’re

not just trading, but living through our-

selves,” he said. “But it’s my job to pro-

tect investor capital, and we made a call

early on that if lockdowns started in the

US it would be massive, as it is responsi-

ble for around 40 per cent of global

gasoline demand.”

Wholesale gasoline in New York,

known as RBOB, has dropped almost 60

per cent in March to 64 cents a gallon.

Mr Andurand, who runs the world’s

largest remaining pure oil fund, lost

around 8 per cent in January after being

on the wrong side of a niche shipping

fuel trade, the Financial Times reported

last month. But he has since more than

recouped those losses by betting aggres-

sively against the crude price, according

to two people familiar with the fund.

One of those people said the main

Andurand Capitalfund is up more than

5 0 per cent this month, while a fund

with wider risk limits more than dou-

bled as the oil price slide accelerated.

Mr Lekander of Lansdowne Partners,

who manages around $1bn and focuses

on renewable energy, is up 6 per cent

this year following big gains in March.

The oil price rout may not last for

much longer, said Mr King at the Mer-

chant Commodity Fund.

“Mass job losses in Texas will not be

tolerated for long, so political risks are

mounting for the Saudis,” he said.

Asset management

Hedge fund

trio scoops

rich rewards

from oil’s fall

‘We made a call early on

that if lockdowns

started in the US it

would be massive’

Big US banks are among the largest buyback spenders

Quarterly share repurchase (bn)

Source: S&P Dow Jones Indices

Bank of America

Wells Fargo

JPMorgan Chase

Citigroup





     

MARCH 20 2020 Section:Markets Time: 19/3/2020 - 17: 47 User: alistair.fraser Page Name: MARKETS1, Part,Page,Edition: EUR, 19, 1