The Wall Street Journal - 04.04.2020 - 05.04.2020

THE WALL STREET JOURNAL. ** Saturday/Sunday, April 4 - 5, 2020 |B15

Three-month Libor-OIS spread†

Sources: FactSet (basis swaps); Refinitive (Libor-OIS spread)

*More positive indicates a lower cost for borrowing dollars †London interbank offered rate minus

overnight indexed swaps

1.3

0

0.5 pct. pts

1.0

pct. pts.

2015 ’16 ’17 ’18 ’19 ’20

Euro

Spreads on three-month cross-currency

basis swaps vs. the dollar*

0.5 pct. pts.

–1.5

–1.0

–0.5

0

2017 ’18 ’19 ’20

Yen

In a sign of receding ten-

sions in international finance,

the cost to borrow dollars

against other currencies mar-

kets has sharply re-

versed in recent

days. A huge short-

age of dollars now

appears to have turned into an

equally large oversupply.

The interest rates on cross-

currency basis swaps, a con-

tract where one party borrows

currency from another and

lends their own currency in re-

turn, were deeply negative in

mid-March, signaling a surge in

demand for dollars. Now the

same rates have hit unusually

high positive levels, suggesting

it has become more costly to

borrow the other currencies in-

stead. The three-month euro-

dollar basis has swung from

minus 0.65% on March 16 to

plus 0.58% Friday. The three-

month yen-dollar basis has

swung from minus 1.24% on

March 20 to 0.25% Friday.

A big part of the reversal is

because the Federal Reserve

launched a series of emergency

measures to ease international

demand for dollars starting

March 17. These included open-

ing swap lines to a string of

foreign central banks. This al-

lows them to borrow dollars

from the Fed in exchange for

their own local currencies. The

foreign central banks can then

supply dollars locally to ease

the strains. The Fed also said

this week it would lend foreign

central banks dollars in short-

term loans backed by Treasury

securities.

International rates to bor-

row dollars shot higher last

month as the spread of the cor-

onavirus hammered markets.

Banks around the world suf-

fered strains to their balance

sheets due to the sudden high

demand for cash—especially

dollars—among companies and

investors worried about eco-

nomic shutdowns.

“The cross-currency basis

swaps are a really important

indicator of the stress in the

CREDIT

MARKETS

money market, and we can see

from them the difference that

the Fed’s liquidity efforts were

making,” said Jane Foley, head

of currency strategy at Ra-

bobank. The recent swings back

in the other direction, however,

may be masking continued un-

derlying stress.

Cross-currency basis swaps

are composed of several com-

plex inputs. These include in-

terest rates that measure bank

funding costs in the U.S. and

abroad, as well as market-

based expectations for foreign

exchange rates, says Matthew

Johnson, a strategist at UBS.

He says the apparent im-

provement in the cross-cur-

rency basis swap market may

be for bad reasons. The U.S.

bank funding cost part of the

equation, for instance, has

jumped in recent weeks. This

can be seen in the difference

between the dollar London in-

terbank offered rate—or Libor,

the rate at which banks lend to

each other—and overnight in-

terest swaps. This has jumped

from 0.77 percentage point in

mid-March to about 1.3 per-

centage points now.

“The Fed has dealt with the

offshore-dollar squeeze, but

there still remains a reasonable

amount of stress” in U.S. do-

mestic markets, Mr. Johnson

said.

A related issue has been the

unusually wide difference be-

tween the prices at which

banks will buy and sell curren-

cies, known as a spread. Much

of the activity was in one direc-

tion with many banks and in-

vestors all trying to buy dollars,

according to Olivier Korber, a

strategist at Société Générale.

“For the first time this week,

we’re seeing some tightening of

the spreads,” he said. “We can

say the worst is behind us.”

Meanwhile, U.S. government

bond yields held steady Friday

after the March jobs report saw

the biggest monthly increase in

the unemployment rate since

1975. Yields on 10-year Trea-
      suryswereat0.595%versus
      0.624% Thursday and 30-year
      Treasury yields were at 1.238%
      compared with 1.268%.

BYPAULJ.DAVIES

ANDCAITLINOSTROFF

Markets Show Relief

Over Dollar Funding

millions of unemployment-in-

surance claims that people

filed in the last two weeks of

March.

A record 6.6 million Ameri-

cans applied for unemploy-

ment benefits last week—dou-

ble the number two weeks ago

—as the country shut down

parts of the economy in an ef-

fort to contain the virus.

Investors were also wary of

fresh data that shows the

spread of the coronavirus

across the U.S. “We could be

entering the next few weeks of

peak fear,” said Rusty Van-

neman, chief investment offi-

cer of Orion Advisor Solutions.

“I think that some of the worst

MARKETS

since the outbreak started.

The S&P 500 fell 38.25

points, or 1.5%, to 2488.65. The

Nasdaq Composite lost 114.23

points, or 1.5%. The Dow Jones

Industrial Average fell 360.91

points, or 1.7% to 21052.53.

Major U.S. indexes ended

the week with modest declines

after logging the worst quarter

since the financial crisis. All

three are down more than 24%

from their mid-February highs.

Many investors were brac-

ing for disappointing jobs num-

bers due to the profound effect

of the coronavirus on people,

businesses and markets around

the world in recent weeks.

“I don’t think anybody’s

surprised that it was a terrible

month,” said JJ Kinahan, chief

market strategist at TD Ameri-

trade. “We know it’s going to

be brutal. These are hard

times.”

Friday’s report marked the

first time since 2010 that em-

ployers shed more workers

than they added. Still, many

were girding for even gloomier

figures to be released in com-

ing weeks. The latest monthly

jobs report doesn’t reflect the

data is yet to come.”

As stocks fell, investors

turned to the relative safety of

government debt. The yield on

the 10-year U.S. Treasury note

fell to 0.587% after settling at

0.624% in the previous session,

capping off a third straight

week of declines. Bond yields

fall as prices rise.

Investors said they were

continuing to track contain-

ment measures in the U.S. and

countries around the world.

Some investors attributed the

smaller gyrations this week to

the moves by the Federal Re-

serve, which they said made it

easier to trade across asset

classes.

In Europe, economic data

out Friday showed the brutal

impact the coronavirus is hav-

ing on economic growth. Pur-

chasing managers’ indexes for

the services sector in the euro-

zone fell to the lowest level

ever. The pan-continental

Stoxx Europe 600 dropped 1%.

In Asia, major stock indexes

were largely flat. The Shanghai

Composite Index closed down

0.6%. The People’s Bank of

China eased monetary policy,

indicating that the Chinese

economy is still in need of sup-

port despite people returning

to work. To encourage more

lending, it cut reserve ratio re-

quirements for small- and me-

dium-size banks by 1 percent-

age point and lowered rates

for commercial banks’ excess

reserves to 0.35% from 0.72%.

On Thursday, Brent leapt

21%, marking its largest one-

day percentage gain on record,

based on data going back to

1988. President Trump said he
      expected Russia and Saudi
      Arabia to agree to cut produc-
      tion. Moscow denied talking to
      the Saudis, but the kingdom’s
      officials said it would consider
      substantial output cuts if other
      nations joined the effort.
      Luca Paolini, chief strategist
      at Pictet Asset Management,
      said Friday’s stock declines
      show the market is skeptical
      about oil-production cuts. It
      would take coordinated action
      from all the major oil produc-
      ers, including the U.S., to make
      a lasting difference.
      “If there’s an agreement for
      a production cut, I would see
      that as a positive,’’ he said.

U.S. stocks and government
bond yields fell Friday, capping
another week of declines, after
new data revealed that the

pandemic’s toll on Americans
has increased by the day.
The monthly jobs report
showed that employers shed
701,000 jobs in March, the
start of a labor-market slow-
down stemming
from the corona-
virus pandemic.
It’s a jarring shift
for a job market that was
booming just a few weeks ago,
with unemployment hovering
near multidecade lows.
Meanwhile, Gov. Andrew
Cuomo said New York, the
hardest-hit state, saw its high-
est single increase in deaths

ByGunjan Banerji,

Anna Hirtenstein

andChong Koh Ping

Stocks Fall as Investors Weigh Jobs Data

New figures on the

toll of the pandemic

also hurt sentiment;

bond yields drop

Source: FactSet

NasdaqComposite

S&P500

Dowindustrials

Russell2000

KBWBanks

–1.7%

–2.1

–2.7

–7.1

–11.0

S&P 500

Index performance this week

2650

2450

2500

2550

2600

Mon. Tues. Wed. Thurs. Fri.

Friday

2488.65

March jobs

report says

701,000 jobs lost

Saudi Arabia and Russia are
pressing the U.S. to coordinate
oil output cuts in an attempt to
stabilize prices, OPEC officials

said, as the demand for crude
plummets amid the coronavirus
pandemic.
U.S. oil companies are di-
vided over the proposed coop-
eration between the world’s
three biggest crude-producing
nations, which would be un-
precedented. Some major oil
companies, including Exxon
Mobil Corp. and Chevron
Corp., are opposed to the plan.
Some American shale produc-
ers, includingPioneer Natural
ResourcesCorp., are trying to
find ways to join the Saudi-and-
Russia-led plan.
Top executives from U.S. en-
ergy companies were expected
to take up the matter in a
White House discussion con-
vened by President Trump on
Friday. Oil prices jumped by
double-digit percentages a sec-
ond straight day on hopes of a
detente in the global price war.
The Saudi-led Organization
of the Petroleum Exporting
Countries and 10 nations led by
Russia are set to hold a virtual
emergency meeting on Monday.
The group is considering
whether to invite representa-
tives from the U.S. and Canada,
including from Texas and Al-
berta. The outcome of Mon-
day’s summit will largely de-
pend on whether Mr. Trump
and U.S. oil companies can
reach a consensus Friday on
oil-production cuts.
While the U.S. government
and some companies cannot
formally join the 23-nation
Saudi-and-Russia-led alliance
because of antitrust and sover-
eignty issues, they are trying to
figure out ways to convince
Saudi Arabia and Russia to re-
duce output. Riyadh and Mos-
cow have privately made it
clear they won’t cut output un-
less U.S. producers do so as
well.
Mr. Trump said Thursday he
was hopeful that a truce could
be worked out in the oil-price
war between Saudi Arabia and
Russia after he had spoken to
Saudi Crown Prince Moham-
med bin Salman.
Saudi Arabia, the world’s
largest crude exporter, slashed

BySummer Said,

Benoit Faucon

andDavid Hodari

haven’t attended OPEC gather-

ings in many years.

Under that option, Saudi

Arabia would reduce output by

three million barrels a day from

current levels, a group of other

Persian Gulf countries and Rus-

sia by 1.5 million barrels a day

each, these people said. Oil pro-

ducers outside the Saudi-Rus-

sian oil alliance, in the U.S.,

Canada, Brazil and others,

would reduce output by about a

further two million barrels a

day, they said. The rest of the

cuts would be shared between

smaller producers who already

belong to the Saudi-Russian al-

liance.

Among those are some U.S.

shale producers, who have told

OPEC they were ready to carry

voluntary production cuts amid

a ballooning oil glut, said peo-

ple familiar with the matter.

Some of them, in Texas, are

backing the possible curtail-

ment of 500,000 barrels a day,

these people said. But major oil

companies are worried any

concerted curbs could expose

them to risks of lawsuits on an-

titrust grounds, they said.

Russian President Vladimir

Putin said Friday that his coun-

try was ready for a deal with

OPEC and the U.S. He said that

a collective cut of 10 million

barrels a day would be needed

to balance the market.

“We are all concerned about

the way the situation is devel-

oping, everyone is interested in

joint and—I’d like to stress it—

coordinated actions to ensure

long-term market stability,” Mr.

Putin said during a video meet-

ing with Russian oil officials.

Vagit Alekperov, the head of

Russian oil major Lukoil, said

that it wasn’t clear by how

much Russia would cut produc-

tion as the situation “changes

every day.”

The U.S. Department of En-

ergy is also looking at ways to

convince the Saudi-and-Russia-

led groups that U.S. producers

can follow through with any

voluntary curbs they propose,

the people said. Many OPEC of-

ficials don’t believe the U.S.

producer will voluntarily re-

duce production without U.S.

government intervention.

While the output reductions

could help cushion the current

oil price crash, most analysts

say it won’t be enough to make

up for how much fuel demand

the pandemic has erased. Gold-

man Sachs, for instance, esti-

mates oil demand this week fell

by 26 million barrels a day—or

a quarter of global demand.

—Georgi Kantchev

contributed to this article.

its prices and said it would un-

leash a flood of oil last month

after it failed to reach a deal

with Moscow on a response to

falling demand. The ensuing

price war, along with lock-

downs and travel bans amid the

pandemic, has pushed oil prices

to their lowest level in 18 years.

Mr. Trump’s remarks on

Thursday sparked a record-

breaking percentage climb in

oil prices, with Brent and U.S.

crude notching gains of 21%

and 25%, respectively.

Brent crude, the global

benchmark rose another 14% to

$34.11 a barrel on Friday. West

Texas Intermediate futures, the

U.S. bellwether, gained 12% to

$28.34 a barrel. Still, both price

gauges have lost about half of

their value since the start of

the year.

The drop has prompted U.S.

producers to slash drilling bud-

gets and idle rigs. The number

of rigs drilling domestically fell

to 664 Friday, down from 770 a

month ago, according to Baker

Hughes Co. Yet it could be

months before the slowdown

results in diminished output.

U.S. crude production has held

near a record level of 13 million

barrels a day through March 27.

The Saudi-and-Russia led al-

liance will discuss output curbs

of 10 million barrels a day in-

cluding North America, on the

Monday conference call, the of-

ficials said. It wasn’t clear

whether North American pro-

ducers would participate. They

Saudis, Russia Press U.S. for Cuts

Energy Ministers Prince Abdulaziz bin Salman Al-Saud of Saudi Arabia and Russia’s Alexander Novak.

LEONHARD FOEGER/REUTERS

lytics firm Rystad Energy said

Friday.

“The entire world is shut

down trying to get rid of this

scourge,” President Trump said

about the pandemic before in-

troducing oil executives at the

meeting. “We’ll work this out

and we’ll get our energy busi-

ness back.”

The first part of the meeting

ended after an hour. President

Trump said there would be a

news conference to discuss

more developments later Fri-

day.

Saudi Arabia and Russia are

pressing the U.S. to coordinate

cuts to oil output in an attempt

to stabilize prices. The outcome

of a virtual emergency meeting

the two are planning for Mon-

day with the Organization of

the Petroleum Exporting Coun-

tries may largely depend on

whether President Trump and

U.S. oil companies can reach a

consensus on U.S. production

cuts.

While some in the industry

want the Trump administration

to pressure the Saudis and Rus-

sians, many large U.S. oil com-

panies oppose cooperation be-

tween the world’s three biggest

crude-producing nations, which

would be unprecedented. Exxon

Mobil and Chevron have lob-

bied against any market inter-

vention, and the possibility

wasn’t discussed in the first

part of the meeting.

Some smaller companies

that drill U.S. shale wells want

the government to intervene

aggressively.Pioneer Natural

Resourceshas pushed to find

ways for the U.S. to join the

plan led by Saudi Arabia and

Russia.Continental Resources

and its founder and Executive

Chairman Harold Hamm, who

was at the meeting, have

pushed for aggressive tactics

such as anti-dumping measures

or U.S. government investiga-

tions of the Saudis for flooding

the market.

President Trump during a

briefing said oil executives

didn’t ask for a bailout. “It was

really more of a discussion than

asking. We did discuss the con-

cept of tariffs because, as you

know, this was a dispute among

a couple of countries,” he said.

WASHINGTON—President
Trump promised oil-industry
leaders the government would
help revive the sector during a
much anticipated White House
meeting Friday.
Chief executives ofExxon
MobilCorp. andChevronCorp.
and leaders of seven other en-
ergy companies joined the
president as the new coronavi-
rus pandemic slows the econ-
omy and ravages the energy
business. Dwindling demand
has helped to halve crude
prices since January and more
than 70 U.S. oil companies, al-
ready heavy with debt, are at
risk of bankruptcy, energy ana-

BYTIMOTHYPUKO
ANDCHRISTOPHERM.MATTHEWS

Trump Offers Help to Revive U.S. Oil Sector

FRIDAY’S
MARKETS

Major oil companies

are worried about

implications of any

concerted curbs.