The Wall Street Journal - 11.03.2020

THE WALL STREET JOURNAL. **** Wednesday, March 11, 2020 |B13

While higher on Tuesday,

the price of Brent crude oil, the

international benchmark, has

fallen 36% since the end of Jan-

uary, when the coronavirus

spread outside China. In major

stock markets, the Stoxx Eu-

rope 600 is down 18% and the

S&P 500 is 15% lower; emerging

markets and corporate credit

have been hit hard.

In that stretch, copper is up

0.5%, aluminum is down 1.3%

and iron ore, a key ingredient

in steel, has fallen around 4%.

Meanwhile, shares in large

miners have been hammered.

Anglo American PLC is down

22% since the end of January,

Glencore PLC is 30% lower, and

Freeport-McMoRan Inc. is

down around 27%.

Given the moderate losses in

metals and iron-ore prices,

mining shares have been over-

sold, said Andrew Hunt, an eq-

uity fund manager at Aberdeen

Standard Investments.

Miners have been disciplined

on supply—controlling the

amount of resources they dig

out of the ground—and demand

will increase as China and other

countries stimulate their econo-

mies with metal-hungry projects

such as bridges, he said.

Hunter Hillcoat, an analyst

at Investec Securities, said iron

ore would need to fall from its

current level of $89.20 a metric

ton to $60 to justify the current

declines in the share prices of

Rio Tinto PLC and BHP Group

Ltd., which are big sellers of

the commodity to China.

Underscoring China’s outsize

role in metals markets, JPMor-

gan calculates that a 10% re-

duction in operating rates—or

the percentage of capacity be-

ing utilized by metal end us-

ers—in China would lead to a

fall in demand of 22,900 metric

tons of copper and 56,300 met-

ric tons of aluminum. A similar

drop-off in activity in Europe

and North America combined

would lead to 11,400 tons less

demand of copper and 30,800

less in aluminum.

Some economic indicators in

China, such as electricity de-

mand and industrial fur-

naces, show tentative signs of

recovery.

To be sure, there are a lot of

risks to metal prices. The con-

tinued spread of the coronavi-

rus will damp economic de-

mand, which will also feed back

to China. As investors sell oil,

they will also reduce exposure

to all commodities, not least

through selling exchange-

traded funds that combine a

range of resources, said Mac-

quarie’s Mr. Price.

But for now, some analysts

say that investors can take

some comfort from the fact

that metals haven’t been hit as

badly as many other markets.

Some analysts say the more

muted response from metals

should ultimately be seen as a

positive for other markets,

given their price moves are of-

ten closely aligned with eco-

nomic fundamentals. Some in-

vestors see bargains in miners,

whose share-price falls have

been more dramatic than the

decline in value of their under-

lying resources.

“The fact the metals are

holding up reasonably well,

notwithstanding global growth

concerns, suggests that the de-

mand-supply fundamentals are

reasonably balanced,” said Mr.

Hillcoat.

The drop in prices has been far outpaced by the broader market. Iron ore being unloaded in China.

AGENCE FRANCE-PRESSE/GETTY IMAGES

Metals prices have yet to join

the latest leg down in the coro-

navirus-prompted market rout,

a sign that some investors see

China’s voracious appetite for

industrial commodities recover-

ing even as the epidemic hits

the rest of the world.

Prices of copper, aluminum,

iron ore and other resources

have sold off this year, but have

fared better

than oil and

equities, in-

cluding the share prices of the

miners who dig them up.

China consumes over half of

all metals production, and while

the new coronavirus hit the

country first and hardest, ana-

lysts believe that the world’s

second-largest economy will be-

gin to recover and buy resources

in large amounts again. Also ex-

plaining metals’ more subdued

reaction of late: They were sold

heavily during last year’s esca-

lating trade war between the

U.S. and China and when the

coronavirus first emerged in

Wuhan, while equities sailed

higher and oil traded flat.

“If China gets through the vi-

rus successfully and has the op-

portunity to stimulate, they will

continue to import iron ore” and

other metals, said Tom Price,

head of commodities research at

Macquarie Group.

BYALISTAIRMACDONALD

COMMODITIES

MARKETS

Municipal-bond prices have

surged as the potential impact

of the novel coronavirus has

driven investors into safer as-

sets. But not all bonds have

enjoyed the rally, with inves-

tors shying away from riskier

debt and from securities likely

to be affected by the virus,

namely travel and hospitality

bonds.

Investors are paying less

for debt from convention-cen-

ter hotels and airports as the

potential economic reach of

the novel coronavirus becomes

clearer. Overall prices on risk-

ier bonds fell last week as

well, as investors pulled

money from high-yield funds

and the S&P Municipal Bond

High Yield Index dropped five

days in a row.

Some investors have become

increasingly concerned that

amid signs of a global slow-

down, these less creditworthy

bonds carry more risk than

they are worth, analysts said.

“A whole bunch of munici-

pal-bond credits are reliant on

a well-functioning economy,

are reliant on a well-function-

ing transportation industry,”

said Nicholos Venditti, a port-

folio manager at Thornburg

Investment Management.

“That’s a little scary.”

Overall, municipal-bond

prices have continued to climb

in the roughly $4 trillion muni

market as investors seek out

safe-haven investments, driving

yields to a nearly 40-year low

Friday, according to Refinitiv.

Muni bonds have been a

sought-after investment over

the past several years as fall-

ing supply and the increasing

value of the tax exemption on

municipal-bond interest have

stoked demand. That leaves

plenty of room for prices to

fall as the market reacts to

risks associated with the virus.

Yields rose between 12%

and 35% from Feb. 28 to

March 5 on a sampling of a

dozen bonds backed by air-

ports, airlines, a convention-

center hotel and an amuse-

ment park, according to an

analysis by Jon Barasch, direc-

tor of municipal evaluations at

financial analytics company

ICE Data Services. The com-

parison is based on trade data

and the firm’s valuations of

those bonds.

That contrasts with the

broader municipal market,

where yields fell 10% for five-

year bonds over the same pe-

riod and rose by a maximum

of 3% for longer-maturity

debt, according to ICE Data

Services’ Muni Yield Curve.

Beginning March 2, “the

weakness became more preva-

lent,” Mr. Barasch said. Yields

rise as prices fall.

While municipal bonds are

most often the liabilities of

state and local governments

with the power to collect taxes

and fees, about $784.5 billion

is issued on behalf of non-

profit or for-profit businesses,

according to Federal Reserve

data, typically for projects

thought to have some public

benefit, such as economic de-

velopment.

Prices dropped on some

bonds backed by airline pay-

ments last week, Municipal

Securities Rulemaking Board

data show. Bonds issued in Oc-

tober to build an aircraft-

maintenance facility at Los

Angeles International Airport

traded at 115 cents on the dol-

lar Thursday, down from

nearly 119 cents on the dollar

in mid-February. Bonds that fi-

nanced a passenger terminal

construction project at Hous-

ton’s George Bush Interconti-

nental Airport, which last

traded around 107 cents on

the dollar in late 2018 and

which analysts had valued at

about 106, sold for 103 cents

on the dollar on Friday.

Meanwhile, the S&P Munici-

pal Bond High Yield Index ex-

perienced its biggest one-day

drop in more than a year Fri-

day. It dropped every trading

day last week. The VanEck

Vectors High-Yield Municipal

Index ETF has its biggest

price drop in at least five

years Monday, a decline of

more than 5%, as investors

continued to pull money from

high-yield munis.

Mr. Venditti said that the

municipal market tends to re-

act more slowly than the cor-

porate-bond market, where

bond prices have already

fallen for many companies

whose fates are linked to

travel or economic growth.

“Ultimately that lag may cost

investors,” he said.

For example, tax-exempt

municipal bonds backed by

United States Steel Corp.

could fetch a yield of 2.394%,

or an estimated 3.8% after

taxes if sold today, according

to an analysis of Bloomberg

data by Mr. Venditti. That

compares with an expected

yield of 10.801% on the com-

pany’s corporate debt.

It isn’t just the infrastruc-

ture and transportation sec-

tors that are vulnerable. High-

yield muni-bond funds often

contain the debt of senior-liv-

ing facilities and financially

distressed local governments,

two borrowers looking particu-

larly susceptible to the impact

of the coronavirus. Long-term-

care facilities around the coun-

try are bracing themselves af-

ter a facility in Kirkland,

Wash., emerged as the site of

some of the earliest U.S. cases.

BYHEATHERGILLERS

Riskier Muni Bonds Miss Rally

Monday

–0.83%

S&PMuniHigh-YieldIndex,dailychange

0.25

–1.00

–0.75

–0.50

–0.25

0

%

2019 ’20

Nethigh-yieldmuni

bondflows,weekly

Sources: Refinitiv (flows); S&P Municipal Bond High Yield Index (prices)

$800

–200

0

200

400

600

million

2019 ’20

Investors withdrew from high-yield muni funds this week.

Oct. 10, 2018

-0.39%

Metals Escape

Worst of Rout on

Hopes for China

AUCTIONRESULTS

Here are the results of Tuesday's Treasury auction.

All bids are awarded at a single price at the market-

clearing yield. Ratesare determined by the difference

between that priceand the face value.

THREE-YEAR NOTES

Applications $83,703,086,600

Accepted bids $38,036,596,200

" noncompetitively $31,948,100

" foreign noncompetitively $10,000,000

Auction price (rate) 99.813012

(0.563%)

Interest rate 0.500%

Bids at clearing yield accepted 80.56%

Cusip number 912828ZD5

The notes, dated March 16, 2020, mature on March 15,

2023.

ing the market vulnerable to

bigger, sudden moves.

During market turmoil,

banks and other market mid-

dlemen tend to reduce their ex-

posure to risky assets by cut-

ting down on the trades they

are willing to handle on behalf

of investors.

One big way banks may be

withdrawing liquidity right

now is by limiting the size of

trades that algorithmic trading

machines carry out. In calmer

times, these programs do the

work of matching buyers and

sellers, roles that used to be

played solely by humans.

Priya Misra, head of rates

strategy at TD Securities, said

the changing structure of the

market, with more algorithmic

and high-frequency traders,

was responsible for some of

the price swings. “The liquidity

in the Treasury market is bi-

Continued from page B1

furcated: sometimes very good,

but when volatility picks up

the high-frequency traders step

away,” she said. “It’s not a

deep market.”

While still less serious than

the 2008 meltdown, there have

been rising signs of strain in

funding markets for banks

themselves. The difference be-

tween the interest rates at

which banks lend to each other

and the interest rate set by the

Federal Reserve rose sharply

late last week. This so-called

FRA-OIS spread peaked early

Monday at its highest level

since spring 2018, according to

Refinitiv data.

The Federal Reserve Bank of

New York said Monday it

would increase the amounts

available in its overnight lend-

ing operations to $150 billion

from $100 billion to help banks

swap more Treasurys for cash.

Other analysts and investors

suspect that efforts to stop the

virus from spreading by asking

some traders to work from

home had also had an impact

on the functioning of markets.

“I’m now the only person in

my team in the office,” said An-

drew Bosomworth, PIMCO’s

head of German portfolio man-

agement. “Fewer people are

trading and they are trading dif-

ferently. People are sitting at

home by themselves communi-

cating via chat—they can’t turn

to colleagues. That means mar-

ket liquidity from a structural

perspective is lower.”

All of this can make flash

crashes—and flash rallies—

where prices make short but

very extreme moves much

more likely. Ms. Misra at TD

Securities said that U.S. Trea-

sury markets had seen “mini-

flash rallies every day for the

past two weeks” when a flood

of buy orders met limited li-

quidity.

Michael Hewson, chief mar-

ket analyst at brokerage CMC

Markets, added that overnight

flash crashes in currencies or

commodities had also become

more likely. The Australian dol-

lar briefly dipped by almost 5%

against the dollar before

quickly recovering.

“It’s absolutely a possibility,

especially in the twilight be-

tween New York close and Asia

open,” he said.

Ken Veksler, chief invest-

ment officer at Accumen Man-

agement, a family office asset

manager, says the increasing

use of machines has made a

difference to volatility in cur-

rencies.

“The price activity in cur-

rencies is going to mimic other

markets where there is most

electronic trading like equi-

ties,” he said. “Machinery mim-

ics the behavior around it.”

Kevin McPartland, head of

market structure and technol-

ogy research at Greenwich As-

sociates, says worries about

difficulty trading are over-

blown. “Given the somewhat

unprecedented state of things

right now, I think the function-

ing of markets have held up

well,” he said.

—Joe Wallace, Anna

Hirtenstein and Tom Fairless

contributed to this article.

Trading

In Markets

Gets Harder

Differencebetweendollarthree-monthforward

rateagreementsandovernightinterestswaps

Source: Refinitiv

Note: A higher reading means a shortage of interbank funding

4

0

1

2

3

percentage points

2009 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19 ’20

INTELLIGENT INVESTOR

By Jason Zweig

A Look in

The Mirror

Is Good

Advice

Forget about
what the stock
market is go-
ing to do. In-
stead, focus on
what you, as
an investor, ought to do.
That advice from Benjamin
Graham, the late great invest-
ment analyst and Warren Buf-
fett’s mentor, can help you
navigate the market’s latest
storm. Should you jettison
some stock or stay the
course? How should you act
now to reduce the odds that
you will kick yourself later for
taking too much risk or too
little? A few of Mr. Graham’s
guidelines can help you know
yourself and act accordingly.
In his writings, including
the classic book after which
this column is named, Mr.
Graham laid out basic distinc-
tions that should guide your
behavior.
First, determine whether
you are an investor or a spec-
ulator. “The investor’s pri-
mary interest lies in acquiring
and holding suitable securi-
ties at suitable prices,” Mr.
Graham wrote. The specula-
tor, on the other hand, cares
mainly about “anticipating
and profiting from market
fluctuations.”
If you’re an investor, “price
fluctuations have only one
significant meaning,” accord-
ing to Mr. Graham: “an oppor-
tunity to buy wisely when
prices fall sharply and to sell
wisely when they advance a
great deal.”
Speculators are in thrall to
the mythical, moody figure
Mr. Graham called “Mr. Mar-
ket,” who offers either to buy
your stock or sell you more.
As Mr. Graham imagined
him—based on reality, of
course—Mr. Market always
wants to trade. Much of the
time, the prices he sets are
sensible. Often, however, they

are “ridiculously” high or low.
Paradoxically, many people
become more eager to trade
with Mr. Market as his prices
become more chaotic. A spec-
ulator is happy to buy more
shares when prices rise, bet-
ting that Mr. Market will buy
them back later at even cra-
zier prices. When Mr. Mar-
ket’s enthusiasm turns to fear
and prices fall, the speculator
sells into that panic.
“The investor who permits
himself to be stampeded or
unduly worried by unjustified
market declines in his hold-
ings is perversely transform-
ing his basic advantage into a
basic disadvantage,” warned
Mr. Graham.
The primary reason many
individuals fail as long-term
investors, Mr. Graham said in
1972, is that “they pay too
much attention to what the
stock market is doing cur-
rently.”
Intelligent investors, he in-
sisted, don’t need superior in-
tellect, training or expertise.
Instead, intelligence consists
of patience, independence and
self-control. You don’t have to
let Mr. Market do the think-
ing for you. “The true inves-
tor scarcely ever is forced to
sell his shares, and at all
other times he is free to dis-
regard the current price quo-
tation,” Mr. Graham wrote.
If you are an investor
rather than a speculator, fig-
ure out whether you are what
Mr. Graham called “defensive”
or “enterprising.” If you are
defensive, you seek to avoid
severe mistakes and losses,
but also don’t want to spend
extensive time, effort and
emotion on investing. If you
are enterprising, you are will-
ing to “devote time and care”
in an attempt to outperform.
Either way, Mr. Graham
wrote, you should reconcile
yourself “to the probability
rather than the mere possibil-
ity” that stocks will fall by
33% or more at least once ev-
ery five years.

Some pay too much

attention to what

the stock market is

doing currently.