Financial Times 08Apr2020

Wednesday8 April 2020 ★ FINANCIAL TIMES 9

CO M PA N I E S & M A R K E T S

N E I L H U M E
N AT U R A L R E S O U R C E S E D I TO R

Supply cuts affecting about one-fifth of
the global mining industry have offset a
collapse in demand due to the corona-
virus outbreak, bolstering prices that
have been hit hard in the past month.

About 15 per cent of the world’s copper
mines and 20 per cent of zinc mines are
now offline or operating at reduced
capacity, according to UBS analysts who
say disruptions could stop industrial
metals from plumbing the depths seen
during the global financial crisis.
In 2008, copper sank below $3,000 a
tonne whereas now it trades close to
$4,500. Zinc and aluminium prices are
also well above their 2008 nadirs.
“The duration and therefore the total
amount of lost supply in 2020 is unclear,
but in our view increasing supply dis-
ruption will act as an important offset to
demand weakness, potentially limiting
commodity price downside,” said
analyst Daniel Major at UBS.
Mexico became the latest country to
impose restrictions on the mining
industry when it ordered last week the
closure of non-essential businesses until

the end of April. The country accounts

for 3 per cent of global copper produc-

tion and 6 per cent of zinc production.

Analysts expect supply disruptions to

increase in the next month as govern-

ments tighten restrictions while pro-

ducers halt mining at marginal opera-

tions to preserve cash. Copper has fallen

20 per cent this year while zinc and alu-

minium are both down 18 per cent.

But supply is still likely to outstrip

demand, setting up a challenging year

for the industry. “The demand destruc-

tion of 156,000 [tonnes] of copper per

week far outweighs the current 60,

of Covid-19-related supply disruptions,”

said Tyler Broda, an analyst at RBC Cap-

ital Markets. “Metals like aluminium,

where it is costly to shut down produc-

tion, face an even worse dynamic.”

If the global economy contracts 1.

per cent in 2020, Morgan Stanley

estimates that demand for aluminium,

which counts the car industry as one of

its biggest consumers, will fall almost 12

per cent. That would generate “an

inventory overhang that could depress

price for several years”, said the bank’s

analyst, Susan Bates.

However, some of the most pessimis-

tic demand scenarios may not material-

ise. China, the world’s biggest consumer

of industrial metals, is returning to nor-

mal and an infrastructure-led recovery

could help mitigate the worst effects of

the downturn in the rest of the world.

“In addition, the rapid global policy

response already seen, and possible

additional measures — such as the $2tn

proposed infrastructure package in the

US — could drive a more rapid upturn in

metals demand and prices than broader

growth suggests,” said Ms Bates.

Commodities

Mining cutbacks help support metals

prices as industrial demand collapses

P H I L I P STA F F O R D

The New York Stock Exchange is plan-

ning to review the effectiveness of

marketwide systems designed to damp

extreme volatility after circuit-

breakers were tripped several times

last month during a stampede from

risky assets.

US markets saw a series of 15-minute

halts to trading in mid-March following

big drops in the S&P 500 index as inves-

tors spooked by the spread of coronavi-

rus scrambled to dump positions.

It was the first time that such protec-

tions had been activated since the

system was revamped in 2012 and most

were tripped moments after the open-

ing bell.

Any changes to the system would

have to be agreed with rival exchange

groups such as Nasdaq and CBOE Global

Markets.

Under the existing system, the S&P

500 can drop as much as 7 per cent from

the previous day’s close before a halt is

triggered.

Further circuit-breakers kick in at 13

per cent and 20 per cent falls to guard

against sharp declines that “may

exhaust market liquidity”, according to

the NYSE.

Stacey Cunningham, president of the

exchange, told the Financial Times that

one area of focus would be the settings

for circuit-breakers for futures on the

index, which can move by a maximum

of 5 per cent in either direction.

That discrepancy between permissi-

ble moves in the futures and the cash

market, she said, could potentially

exacerbate pressure on stocks in the

opening minutes. “Having the trigger

right after the open, when there wasn’t

new news in those few seconds to min-

utes, is certainly something we’re going

to explore, to see if we can further

improve the way the marketwide

circuit-breakers work,” she said.

Ms Cunningham noted that the

exchange traded fund linked to the S&P

500, typically one of the most traded

daily securities in US markets, had con-

tinued to trade when the out-of-hours

futures markets hit their limits.

The security, known as the SPDR, had

traded much lower.

“It turned out that the ETF was a very

good indicator of the overall value of the

index. It became a price discovery

mechanism on its own,” she said.

The coronavirus crisis forced the

NYSE to close its famous trading floor at

11 Wall Street for the first time in its 228-

year history.

Ms Cunningham said the overall mar-

ket quality had been good, although

“not as good as with people involved”.

She also defended the decision not to

close the floor earlier.For Ms Cunning-

ham, who started on the NYSE floor 25

years ago, the decision was “not one we

took lightly”.

Many floor traders were patriotic and

had wanted it to stay open, she added.

“It’s also the symbolic nature of the

trading floor that’s important. Having

the floor open for business and running

is an important message,” she said.“The

floor will definitely open again. We’re

going to provide full service, once we

can do so safely.”

Equities

NYSE to review circuit-breaker system

after stampedes to dump risky assets

‘Having the trigger right

after the open is

certainly something

we’re going to explore’

Mexico is among the countries that

have imposed restrictions on mining

J O E R E N N I S O N

On a sunny day in May 2012, Ford
employees dressed in a mix of blue and
white T-shirts gathered on the lawn
outside the company’s headquarters in
Dearborn, Michigan, celebrating the
restoration of its investment grade
credit rating by arranging themselves to
form the iconic oval logo.
Ford had beendowngraded evens
years earlier, along with General
Motors, in what were the biggest ever
demotions to the junk market in terms
of bonds outstanding.
Ford’s elaborate celebration in 2012
signified the importance of a top-quality
rating to the company — a point it
reiterated on earnings calls with inves-
tors over the following eight years.
“We remain committed to maintain-
ing a strong balance sheet and holding
investment grade credit ratings,” Tim
Stone, chief financial officer, said on the
company’s fourth-quarter earnings call
in February, adding that Ford would
be in good shape to tackle the next
recession.
Little did he know it would arrive so
soon. The onset of Covid-19 has rup-

tured the global economy with Ford

closing most of its global plants, threat-

ening an already ailing turnround

effort launched by chief executive Jim

Hackett.

Downgrades by S&P and Moody’s this

month stripped the company of its

investment grade status once again,

sending 36bn of debt back into junk$

territory.

At the same time, the cuts have fed

fears over the effects of a series of fallen

angels, the moniker given to companies

that lose their investment grade title.

Some investors are bound by require-

ments to hold only higher rated debt, as

exemplified by Western Asset, one of

the biggest bond managers in the US.

Western has sought toavoid fire salea

by requesting more time to sell bonds

issued by Occidental Petroleum, after

the oil company wascut o junk lastt

month.

Such rapid selling by investors has

raised concerns that fallen angels could

exacerbate strains in corporate bond

markets.

“It is shocking a lot of people,” said

Hans Mikkelsen, a strategist at Bank of

America. “We have been pushed into a

recession at a speed we have never seen

before. Everyone is scrambling. Rating

agencies are downgrading companies in

a matter of weeks when it would usually

take months.”

A record $90bn of debt fell to junk sta-

tus in March, according to Deutsche

Bank analysts. BofA warns that the total

for the year could reach$200bn.

Investors appear to be set for even

higher tallies. At the end of last week,

$360bn of triple B rated bonds, the

lowest rung of investment grade, were

trading with yields comparable to that

of double B rated debt.

Finding buyers for fallen angels could

be challenging. The $6.7tn investment

grade bond market is far larger than

the $1.2tn high-yield bond market, as

measured by indices produced by Ice

Data Services.

Moreover, for the next month, the

challenge may have been made harder

by decisions from key index providers.

Bloomberg operates what is widely

considered to be the benchmark invest-

ment grade bond index and booted out

issuers like Ford, Occidental and Macy’s

at the turn of this month.

But Ice, which runs a widely tracked

high-yield bond index, has chosen to

wait a month before including the new-

comers in an attempt to reduce friction

while price movements remain ele-

vated.

That means fund managers specialis-

ing in high-yield bonds will have to

make a decision about whether to stray

from the index to buy the debt before

the month is up.

“This could lead to meaningful dis-

persion in returns between managers,”

said John McClain, a portfolio manager

at Diamond Hill Capital Management.

The fallen angels are changing the

composition of the market in other ways

too.

Some of the newcomers, such asKraft

Heinz, have issued very long-term debt,

for example, which could be hard to

digest for investors more accustomed to

lending money for shorter periods of

time. The average time to maturity of

bonds in the junk market has risen from

5.8 years in February to 6.1, according to

Ice, even before the inclusion of some of

the longer-dated debt from Ford.

It is hard to disentangle changes in

price caused by fallen angels from the

broader market movements over the

past month.

Ford’s debt has largely risen in price

since it was downgraded a week ago, but

so has the rest of the market.

Kraft Heinz’s 30-year bonds have also

performed well since their downgrade

in February, said Kevin Lorenz, a portfo-

lio manager at asset manager Nuveen,

helped by the company’s position in a

relatively defensive sector.

“I think every day, everyone needs to

reorient themselves to what is happen-

ing as a result of the pandemic and its

ramifications,” he said. “Investors

should be braced for continued

volatility in the market.”

Additional reporting by Claire Bushey in

Chicago

Pandemic has plunged the

debt of many US blue-chip

companies into junk territory

‘We have

been

pushed into

a recession

at a speed

we have

never seen

before’

Ford has been

downgraded by

Moody’s and

S&P this month

Jeff Kowalsky/AFP

Fixed income. redit downgradesC

Bond investors rattled by

flood of fallen angels

R I C H A R D H E N D E R S O N

Big US companies will spend half as

much buying back their own stock this

year compared with 2019, Goldman

Sachs analysts predict, weakening a

vital prop for the market as companies

shore up their balance sheets.

Share repurchases for companies in

the benchmark S&P 500 index will hit

$371bn by the end of the year, 50 per

cent lower than the $730bn spent last

year,Goldmantold clients on Friday —

releasing its estimate on Monday.

David Kostin, the investment bank’s

chief US equity strategist, said 51 com-

panies had suspended their share repur-

chases since the beginning of March,

equivalent to 27 per cent of aggregate

buybacks last year.

“A spate of recent suspensions, esca-

lating employee lay-offs and increasing

political and social pressure will curtail

buyback spending, which remains his-

torically elevated following the passage

of corporate tax reform,” Mr Kostin

wrote in a research note.

This reduced demand “from the prin-

cipal buyer of shares during the past

decade”, he added, would lead to wider

trading ranges, less support for the

market during sell-offs and slower

growth in earnings per share.

A drop in spending on buybacks will

add further pressure on a market grap-

pling with the fallout of coronavirus on

the global economy.

Share buybacks have boomed since

the financial crisis and reached a record

$806bn in 2018, the first year of the cor-

porate tax cuts ushered in by President

Donald Trump, helping to boost the

stock market to record highs.

Apple, the biggest spender in recent

years, typically buys more than $10bn

of its shares every quarter.

The repurchases have attracted the

attention of politicians. Mr Trump

expressed dismay that companies had

used the tax cut to buy back stock.

Joe Biden, frontrunner for the Demo-

cratic nomination in this year’s presi-

dential elections, last month called on

US chief executives to “publicly commit

now to not buying back their company’s

stock” for a year.

Bernie Sanders, his party opponent,

wrote an opinion article last year calling

for curbs on buybacks.

The US government’s $2tn emergency

stimulusbans companies that take a

loan under the package from paying a

dividend or conducting share buybacks

for 12 months until after the debt is

repaid. Aircraft maker Boeing and air-

line Delta are among big companies to

have announced halts to their share

repurchases and dividends.

A group of eight big US banks has also

paused share buybacks. Thisincludes

four of the biggest spenders onbuy-

backs in the S&P 500 — Bank of Amer-

ica, JPMorgan, Citi and Wells Fargo.

Equities

US stocks face

more pressure

as buybacks

set to halve

‘A spate of suspensions,

employee lay-offs and

political pressure will

curtail buyback spending’

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Coronavirus sparks rise

in downgrades to junk

Developed market US dollar

fallen angels tally

Sources: Deutsche; Ice indices







Jan  Mar

US dollar fallen angels rise

Over the previous  months as a 

of the total triple B debt outstanding







    

APRIL 8 2020 Section:Markets Time: 4/20207/ - 18:04 User:stephen.smith Page Name:MARKETS1, Part,Page,Edition:EUR , 9, 1