20 ★ Thursday5 March 2020

Mohamed El-Erian

Markets Insight

US medical insurers includingAnthem,
Cigna nda CVS ebounded after Joer
Biden’s surge in the Democratic
presidential primaries was seen as
lessening the likelihood of Medicare for
All legislation.
Cross-state exit poll totals found only
42 per cent of primary voters said they
were in favour of replacing all private
health insurance with a single
government-managed system.
Centene ollowed its peers higher asf
the primary results eclipsed weak 2020
guidance from the managed-care insurer,
which reflected a potential Medicaid rate
cut in the state of New York.
HP Enterprise as the S&P 500’sw
sharpest faller after supply chain and
factory disruptions meant its first-quarter
revenue missed expectations.
The hardware maker lowered free cash
flow targets after a tough quarter for its
computing and storage business lines.
RetailersNordstrom,Urban Outfitters
andDollar Tree ere all lower after theirw
quarterly results disappointed.
ButAbercrombie & Fitch roke nineb
days of falls on better than feared figures.
Campbell Soup it its best level sinceh
2017 on forecast-beating results and
upgraded full-year guidance, thanks to
lower interest expense.Bryce Elder

Wall Street Eurozone London

Pharmaceutical groupBayer ose after ar

Deutsche Bank upgrade to “buy”.

Deutsche said that, even after cutting

earnings forecasts to the low end of

Bayer’s guidance and increasing litigation

payout costs to €12bn from €10bn

previously, the shares were too cheap.

Compound annual earnings growth of

10 per cent until 2023 and a prospective

15 per cent shareholder return per annum

should be worth more than nine times

earnings, the broker said.

HelloFresh xtended a post-resultse

rally into a second day.

Barclays, repeating an “overweight”

rating, said 2020 guidance from the food

delivery company was “impressive” and

left room for upgrades given

management “tends to guide with a

sensible level of conservatism”.

A short squeeze liftedEurofins

Scientific, with the laboratory-testing

company pledging with results that free

cash flow would double this year as one-

off costs and exceptional items tail off.

Evonik Industries ained after settingg

out a rejig of its divisional structure that

raised hopes of disposals.

Fourth-quarter results and 2020

guidance from the German speciality

chemicals company matched market

expectations.Bryce Elder

Wm Morrison limbed after Exane BNPc

Paribas turned positive.

UK supermarkets were offering

“compelling value” with the coronavirus

unlikely to have a big effect on

consumption, it said.

Defensive sectors and dollar earners

such asReckitt Benckiser ed the widerl

market rally in the wake of the Federal

Reserve’s emergency rate cut.

But stocks directly hit by virus-linked

repercussions missed out on the rally.

Rolls-Royce, Premier Inn wnero

Whitbread nda Compass, the contract

caterer, all faded.

Rio Tinto as the best performerw

among the large-cap miners after Société

Générale upgraded to “buy” on valuation

grounds.

“Although the near-term earnings

outlook is somewhat opaque due to risks

to commodity demand, we believe the

share price does not fully reflect long-term

fundamentals, which remain solid,” it said.

Intu Properties lunged after poorp

market conditions forced the shopping

centre owner to abandon plans for a

rights issue.

Year-end figures from Intu were much

worse than investors had expected, which

weighed onpeerHammerson.

Bryce Elder

3 Wall Street rebounds on hope of
further Fed rate cuts
3 Healthcare stocks rally following
setback for Sanders
3 Yield for 10-year US Treasury remains
below 1 per cent milestone

Expectations of more central banking
easing alongside a knock to Bernie
Sanders’ presidential ambitions helped
Wall Street to rebound yesterday from
losses in the previous session.
The US Federal Reserve this week cut
its main policy rate by half a percentage
point in a bid to alleviate the economic
fallout from the coronavirus crisis.
“The Fed is likely to cut again but how
soon remains the question,” said Esty
Dwek, head of global market strategy at
Natixis Investment Managers.
She added that other central banks
were “likely to follow suit, even if their
firepower is more limited”.
The Bank of Canada cut its benchmark
interest rate by half a percentage point
yesterday, citing a “material negative
shock” to its economy owing to the public
health emergency.
By midday in New York, the S&P 500
index had bounced back 1.4 per cent with
healthcare the best performing sector
after Mr Sanders, who campaigns for a
single-payer national health insurance
plan, lost ground to Joe Biden in the
Democratic primaries following the
“Super Tuesday” elections.

“Healthcare stocks have traded closely

with prediction-market primary odds for

the last several months,” said analysts at

Goldman Sachs. The sector was up more

than 3 per cent esterday.y

Mr Biden received a further boost after

Michael Bloomberg ended his bid for the

White House and threw his support

behind the former vice-president.

“The one-two punch thrown on

Tuesday by the big Fed rate cut and the

Biden win.. .has put a floor under the

stock market for now,” said Chris Rupkey,

chief financial economist at MUFG Union

Bank. “The coronavirus market sell-off

looks to be stabilising.”

Outside the US, the region-wide Stoxx

Europe 600 rose 1.4 per cent while in Asia

the CSI 300 of Shanghai- and Shenzhen-

listed stocks gained 0.6 per cent.

The week’s rally in haven assets cooled,

although the yield on the 10-year US

Treasury remained below 1 per cent at

0.98 per cent, having passed the

milestone on Tuesday.

Brent crude, the global benchmark,

eased back 0.3 per cent to $51.76 a barrel.

Ray Douglas

What you need to know

Healthcare rallies after Biden’s strong showing against Sanders

Rebased

Source: Bloomberg







Mon Tue Wed

S&P  Healthcare sector

S&P  index

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 3050.66 1509.46 21100.06 6815.59 3011.67 105740.
% change on day 1.57 1.49 0.08 1.45 0.63 0.
Currency $ index (DXY) $ per € Yen per $ $ per £ Rmb per $ Real per $
Level 97.418 1.114 107.290 1.282 6.933 4.
% change on day 0.273 -0.358 -0.246 0.000 -0.680 1.
Govt. bonds 10-year Treasury 10-year Bund 10-year JGB 10-year Gilt 10-year bond 10-year bond
Yield 0.957 -0.642 -0.145 0.368 2.740 6.
Basis point change on day -8.640 -1.500 -2.880 -1.900 -4.700 0.
World index, CommodsFTSE All-World Oil - Brent Oil - WTI Gold Silver Metals (LMEX)
Level 349.05 51.55 47.15 1615.50 16.81 2624.
% change on day 1.29 -0.52 0.00 0.99 -0.62 -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 Mar

2880

3040

3200

3360

3520

| |||||||||||||||||||

Jan 2020 Mar

1440

1520

1600

1680

1760

| ||||| |||||||| ||||||

Jan 2020 Mar

6400

7040

7680

Biggest movers
% US Eurozone UK

Ups

Anthem 13.

Humana 12.

Centene 11.

Cigna 8.

Unitedhealth 8.

Evonik Industries 5.

Enel 5.

Brenntag 5.

Edp 5.

Bouygues 5.

Reckitt Benckiser 5.
Vodafone 4.
Morrison (wm) Supermarkets 4.
Sse 4.
Astrazeneca 3.
%

Downs

Hewlett Packard Enterprise -7.

Ingersoll-rand -5.

Nordstrom -5.

Halliburton -5.

Norwegian Cruise Line Holdings Ltd -4.

Prices taken at 17:00 GMT

Amadeus It -3.

Thyssenkrupp -3.

Societe Generale -3.

Caixabank -3.

Sodexo -3.

Based on the constituents of the FTSE Eurofirst 300 Eurozone

Rolls-royce Holdings -4.

Tui Ag -4.

Whitbread -3.

Int Consolidated Airlines S.a. -3.

Ashtead -3.

All data provided by Morningstar unless otherwise noted.

S

udden sell-offs in markets

have a nasty way of exposing

vulnerabilities that take on a

disruptive life of their own

and risk amplifying the initial

shock through a self-feeding cycle.

It is important to remember, in this

context, the large amount of US invest-

ment grade corporate debt that hangs

over the high-yield market like a

Damoclean sword. Much of it is facing a

considerably higher risk of downgrade,

given the global economic slowdown

caused bycoronavirus.

The greater the movement down to

junk status, the higher the risk of a

waterfall of funding dislocations that

makes everything worse, financially

and economically.

The spread of the virus has triggered

shocks to demand, supply and finance.

The outbreak has destabilised cost-

to-income ratios, through both lower

revenues and higher spending, and it

has complicated decisions over staffing

and inventory management.

At the same time, it has undermined

the reliability of supply chains and just-

in-time inventory management. And,

for those companies with large amounts

of debt payments falling due, it limits

what has been, until now, very easy

access to credit.

The more the virus spreads, the

greater the numbers of economic

“sudden stops” around the world, and

the harder it is for policies to soften the

blow. After all, this is not a finan-

cialsudden stop, in which central banks

can intervene to ease fears over counter-

party risk, fix market failures and help

the economic recovery.

It is an economic sudden stop that

requires decisive progress in reducing

transmission, and improving immunity

and recovery rates. As such, even

dramatic policy actions, such as

Tuesday’s emergencyrate cut y the USb

Federal Reserve, are ineffective.

The result is deteriorating credit

quality at a time of poor technical condi-

tions for several segments of the US cor-

porate bond market — which, at some

$10tn, is five times as large as it was in

2001, according to BlackRock.

Years of extremely lax financial con-

ditions have encouraged and enabled

massive issuance of debt at ever-lower

interest rates, including tighter spreads

over risk-free government securities.

The easier it became for companies to

issue bonds, the greater the temptation

for companies to engage in what is

known as financial engineering to alter

their capital structures.

The result is that corporate debt has

risen significantly faster than earnings

growth and cash balances, resulting in a

significant downward ratings migration

that now has half of the total investment

grade market clinging to that status with

a triple B rating, up from less than one-

fifth in 2001.

Among the companies on that bottom

rung, a third are already rated triple B

minus and thus at greater risk of a

downgrade to junk.

The likelihood of a growing number of

“fallen angels” comes at a time when the

longstanding structural deficiency of

the $1.2tnhigh-yield market —that is, a

small base of dedicated investors rela-

tive to the amount of outstanding bonds

— is more apparent. Liquidity stress

could be exacerbated by a lack of funds

willing to cross over into junk territory,

put off by spikes in credit spreads and

less-friendly trading conditions.

This would not be a notable risk to

economic wellbeing and financial stabil-

ity, were it not for ther developments.o

First, according to the Federal

Reserve Bank of New York,net leverage

— the ratio between a company’s net

debt and its earnings before interest,

tax, depreciation and amortisation — is

roughly equal for triple B rated bonds

and high-yield debt.

Second, the inability to readily trade

high-yield bonds at decent bid-offer

spreads will damage the primary mar-

ket for bond issuance, putting pressure

on companies looking to refinance

maturing debt.

Third, the proliferation of exchange

traded funds has increased ownership

by more flighty investors.

Fourth, investors unable or unwilling

to sell their high-yield holdings willlook

for other assets to offload, spreading dis-

ruptions from one market to another.

Finally, the enormous growth of this

debt market has been accompanied by a

sharp fall in intermediaries ready to

make markets in times of stress.

Now, both companies and investors

must navigate the economic and finan-

cial effects of the coronavirus that

heighten credit risk while sucking

liquidity out of the bond markets.

The longer it takes to contain these

spillovers, the larger the credit down-

grades, the higher the threats of default

— and the greater the likelihood of

markets contaminating the economy.

Mohamed El-Erian is Allianz’s chief

economic adviser and president-elect of

Queens’ College, University of Cambridge

Coronavirus raises

risk of default for

corporate bonds

The longer it takes to

contain these virus

spillovers, the larger

the credit downgrades

MARCH 5 2020 Section:Markets Time: 3/20204/ - 18:54 User:stephen.smith Page Name:MARKETS2, Part,Page,Edition:EUR , 20, 1