The Wall Street Journal - 13.03.2020

THE WALL STREET JOURNAL. Friday, March 13, 2020 |B11

Gold prices fell sharply

Thursday, a worrisome devel-

opment for some analysts who

are concerned that investors

are being forced to sell many

assets to raise cash.

Front-month gold futures

fell 3.2% to $1,589.30 a troy

ounce on the

Comex divi-

sion of the

New York Mercantile Exchange,

erasing a chunk of their gains

this year and bringing their

drop for the week to more than

5%.

The haven metal is still up

more than 20% over the past 12

months and recently hit a

seven-year peak.

But those gains have re-

versed recently with investors

selling assets to raise cash as

the coronavirus threatens to tip

COMMODITIES

AUCTION RESULTS
Here are the results of Thursday's Treasury auctions.
All bids are awarded at a single price at the market-
clearing yield. Rates are determined by the difference
between that price and the face value.
FOUR-WEEK BILLS
Applications $128,358,491,900
Accepted bids $53,088,439,400
" noncompetitively $1,391,605,500
" foreign noncompetitively $0
Auction price (rate) 99.969278
(0.395%)
Coupon equivalent 0.401%
Bids at clearing yield accepted 39.99%
Cusip number 9127962B4
The bills, dated March 17, 2020, mature on April 14,
2020.
EIGHT-WEEK BILLS
Applications $121,219,408,700
Accepted bids $42,470,808,700
" noncompetitively $204,966,000
" foreign noncompetitively $0
Auction price (rate) 99.954889
(0.290%)
Coupon equivalent 0.294%
Bids at clearing yield accepted 79.94%
Cusip number 9127962L2
The bills, dated March 17, 2020, mature on May 12,
2020.
29-YEAR, 11-MONTH BONDS
Applications $37,747,570,000
Accepted bids $16,015,385,200
" noncompetitively $2,430,400
" foreign noncompetitively $0
Auction price (rate) 116.761508
(1.320%)
Interest rate 2.000%
Bids at clearing yield accepted 42.48%
Cusip number 912810SL3
The bonds, dated March 16, 2020, mature on Feb. 15,
2050.

in the U.S. stock market than it

did 20 years ago, the traders

who work there still handle

certain critical processes, par-

ticularly the 4 p.m. closing

auctions that determine end-

of-day prices for thousands of

NYSE-listed stocks.

The last time the NYSE

floor was forced to close was

when superstorm Sandy

flooded lower Manhattan in

2012. But that happened as
      part of a broad two-day shut-
      down of the entire market.
      NYSE’s current backup plan
      has only been tried out in spe-
      cial weekend tests and never
      during real-life trading condi-
      tions.

Under the plan, the trading

firms that oversee the closing

auctions—known as desig-

nated market makers—would

connect to NYSE’s systems re-

motely to run the auctions. If

the DMMs were unable to do

so, though, the exchange

would run the auctions with-

out them.

The NYSE also plans to sus-

pend all initial public offerings

during any period when the

floor is offline, according to a

notice it sent this month re-

minding traders how the plan

works.

The closing prices gener-

ated by the NYSE’s auctions

are used as benchmarks by in-

Fears over the coronavirus
pandemic are prompting the
New York Stock Exchange to
prepare to implement a con-
tingency plan to close its
trading floor and switch to
backup electronic trading sys-
tems.
The plan has some on Wall
Street worried it could lead to
trading disruptions when mar-
kets are already fragile.
The NYSE has already taken
measures to limit the spread
of coronavirus, including re-
strictions on outside visitors
that typically tour the floor.
That includes corporate execu-
tives and other VIPs who come
to ring the opening or closing
bell. NYSE is owned byInter-
continental ExchangeInc.
So far NYSE has resisted
shutting its floor. But it may
feel additional pressure to do
so after the futures exchange
CME Group Inc. said late
Wednesday that it would close
its Chicago trading floor as a
precaution against the spread
of coronavirus.
Although the NYSE floor
plays a far less important role

BYALEXANDEROSIPOVICH

MARKETS

dex funds and exchange-traded

funds owned by millions of in-

vestors, as well as numerous

futures and options contracts.

Closing auctions held by NYSE

andNasdaqInc. have drawn

an increasing share of daily

trading volume over the past

decade, in part because of the

rising popularity of ETFs and

index funds.

“The closing auction is ar-

guably the most important

moment of the trading day,”

said Greg Tusar, a former

global head of electronic trad-

ing at Goldman Sachs Group

Inc. “Anything that happens to

it that hasn’t been tested is a

risk that is material in nature.”

Mr. Tusar added, however,

that the NYSE’s current backup

plan was an improvement over

its plan during Sandy.

During the weekend before

the storm hit in October 2012,

jitters from brokers, trading

firms and other exchanges

about NYSE’s ability to operate

without its floor led to a last-

minute decision to shut down

the stock market altogether.

NYSE says now it is ready, if

circumstances require it, to

shut the floor.

Over the past week, officials

from the Securities and Ex-

change Commission have dis-

cussed the backup plan with

executives from DMM firms as

well as NYSE officials, people

familiar with the matter said.

NYSE Braces for Potential Floor Closing

Some fear plan could

lead to trading

disruptions amid

already fragile markets

The New York Stock Exchange has resisted shutting down its historic trading floor but may feel more pressure to do so now.

ANDREW KELLY/REUTERS

the world economy into a re-

cession. Stocks have tumbled

into a bear market, long-term

U.S. Treasury yields have slid to

record lows, and volatility has

gripped currencies around the

world.

Traders cited a number of

reasons for Thursday’s slide in

bullion. Investors are being

forced to raise cash to make up

for losses from stocks, includ-

ing margin calls for those who

had used stocks as collateral to

buy other securities. With the

value of those positions shrink-

ing substantially, banks can de-

mand repayment, triggering

forced sales of unrelated assets.

Additionally, some investors

have been seeking long-term

buying opportunities for stocks

and other riskier assets and

could be raising cash to fund

those purchases, analysts said.

“The well established market

rules are out the window right

now,” said Tai Wong, head of

base and precious-metals deriv-

atives trading at Bank of Mon-

treal. “It’s really like the Wild

West.”

The pain extended to shares

of gold-mining companies,

which fell sharply alongside the

broader market Thursday.

NewmontCorp. slid 3.4%, ex-

tending its drop for the week to

15%, while theVanEck Vectors

Gold Miners ETFdeclined 11%.

Another factor driving the

decline in gold was a surging

dollar. A stronger U.S. currency

makes commodities denomi-

nated in dollars more expensive

for overseas buyers.

The WSJ Dollar Index, which

tracks the dollar against a bas-

ket of 16 other currencies, ad-

vanced 1.2% Thursday, also ex-

tending a recent stretch of

outsize swings.

BYAMRITHRAMKUMAR

Dow Posts Investors Cash Out of Gold

Worst Drop

Since 1987

tain sectors.
Even so, all three major in-
dexes are down more than 16%
for the week.
“We are beyond the logical,
mathematical approach to
things,” said Steven Dudash,
president of Chicago-based IHT
Wealth Management. “We’ve
got complete overreactions go-
ing on because of the fear of
the unknown.”
“When you see that, you
can’t expect to see a logical re-
sponse to interventions,” he
said.
The stock declines followed
a dizzying amount of new in-
formation Wednesday night
about the economic fallout of
coronavirus. In a span of just
hours, Mr. Trump announced a
30-day ban on most travel from
Europe to the U.S., the National
Basketball Association sus-
pended its season indefinitely,
and an increasing number of
colleges suspended in-person
classes.
U.S. futures tied to all three
stock indexes fell to their maxi-
mum allowed decline of 5% be-
fore trading opened.
“We had so many things hit-
ting us all at the same time,”
said Tim Courtney, chief in-
vestment officer of Exencial
Wealth Advisors. “With so
many larger organizations and
larger pieces of the economy
now changing, it looks like life
is going to be different for the
next 30 or 60 days.”
“It’s hitting home now in a
way that it wasn’t a few days
ago,” he said.
Some investors were disap-
pointed Mr. Trump didn’t
clearly articulate details of how
he planned to get an economic-
stimulus package through Con-
gress. Meanwhile, there was
concern about the lack of coor-

Continued from page B1

dination between the federal

government and Federal Re-

serve.

“What you really need is

confidence building,” said Hani

Redha, a London-based multia-

sset portfolio manager at Pine-

Bridge Investments. “That

comes from giving detailed

communication to the market

about what they’re seeing and

doing to develop the sense

there’s a comprehensive ap-

proach.”

Outside of the U.S., losses

were broad. European equities

also fell, with the Stoxx Europe

600 shedding 11.5%, its worst

one-day performance on re-

cord.

The fall for all three U.S. in-

dexes into bear-market terri-

tory comes just weeks after

they each reached highs. The

S&P 500 and Nasdaq both slid

into a bear market after just 16

trading days.

Volatility has reverberated

across the entire market, with

U.S. Treasury yields and oil

prices also recently tumbling to

historic lows. The yield on the

10-year U.S. Treasury finished

Thursday at 0.842%, slightly up

from the day before.

Brent crude, the global oil

benchmark, fell 7.2% to $33.22

a barrel, reflecting concerns

about lower demand for jet

fuel and other types of energy.

Meanwhile, the Cboe Volatil-

ity Index, a measure of volatil-

ity in the U.S. equity market,

rose to its highest level since

2008.

“Markets simply don’t know

what the next steps are in

terms of the virus spread,” said

Edward Park, deputy chief in-

vestment officer at Brooks

Macdonald. “We will see a dip

in global growth in Q1 and Q2

and all the fiscal stimulus out

there can’t avoid that.”

The prospects for global

growth have dimmed in recent

weeks, and a number of major

multinational companies ex-

pect their earnings to take a hit

from the virus. The IHS Markit

also pared its forecast for this

year to 1.7%, saying this week

that it expects zero growth in

the eurozone, a contraction in

Japan and expansion of just

4.3% in China this year.

Even with readjusted fore-

casts, much remains uncertain,

especially after global health

officials declared the virus a

pandemic on Wednesday.

Companies and exchanges

are making contingency plans.

CME GroupInc. said it would

close its Chicago trading floor

to pre-emptively avoid the

spread of the virus.

Japan’s Nikkei 225 dropped

4.4% to enter a bear market, a

measurement defined as a re-

treat of more than 20% from a

recent peak.

Markets are likely to remain

volatile, Paul Sandhu, the Asia-

Pacific head of multiasset

quant solutions and client advi-

sory for BNP Paribas Asset

Management in Hong Kong,

said.

“The fear coming off from

the coronavirus is going to be

something that continues over

the next few weeks at least, “

he said.

—Joanne Chiu

contributed to this article.

ral-gas companies will have less

money coming in to meet exist-

ing debt payments and a less

valuable asset in the form of

energy reserves that they will

be able to borrow against.

If energy prices stay at this

level, loan losses in banks’ en-

ergy portfolios would notch a

“notable uptick,” analysts at

KBW wrote in a note on Mon-

day.

Markets

Revenue from Wall Street

businesses such as investment

banking and trading account

for one of banks’ biggest

sources of fee income, and both

are sensitive to the coronavi-

rus. Since the start of the year,

reluctance from corporate

chiefs to pursue deals has

driven global mergers-and-ac-

quisitions volume down 28%

from this point in 2019, accord-

ing to data from Dealogic.Citi-

groupInc. is expecting invest-

ment-banking fees to fall in the

first quarter, finance chief Mark

Mason said at an investor con-

ference Wednesday.

Volatile markets kept banks’

trading desks busy during the

first quarter, but fees from that

business likely won’t be enough

to offset weakness elsewhere.

poorly for many of the loans

banks already have on their

books. Delinquencies and de-

faults on mortgages, auto loans

and credit cards tend to rise

and fall with the unemploy-

ment rate, and any prolonged

period of joblessness likely will

mean that borrowers fall be-

hind on their loan payments.

Banks have been more con-

servative in extending credit to

consumers since the financial

crisis. But things can worsen

quickly: Banks have been reduc-

ing the reserves they have set

aside to cover potential defaults

recently, even as defaults on cer-

tain loan categories have been

rising, according to FDIC data.

Even if consumers keep pay-

ing back their loans, their

spending on luxuries such as

dining out and vacations is

likely to fall, decreasing reve-

nue that banks earn on those

kinds of credit- and debit-card

transactions.

Not Out of Energy

Many of banks’ corporate

borrowers will also face diffi-

culties making loan payments

in a worsening economy, espe-

cially those in the energy sec-

tor. A steep decline in oil prices

this week means oil and natu-

according to estimates from

Credit Suisse Group AG. The av-

erage big U.S. bank will face a

2% hit to revenue from a drop in

interest rates of that magnitude,

according to Credit Suisse.

Falling Loan Growth

Banks might also struggle to

make up on loan volume what

they are giving up in terms of

loan yields. Throughout 2019,

businesses and consumers

showed a willingness to bor-

row, and loan balances at all

U.S. banks at the end of the

year were up 3.6% from their

levels at the end of 2018, ac-

cording to FDIC data.

More recently, fears of the

coronavirus weighed on busi-

nesses’ decisions to invest and

expand. Commercial and indus-

trial loans increased by less

than 1.5% each week in Febru-

ary compared with the same

period last year, according to

data from the Fed. In February

2019, commercial and industrial

growth exceeded 10% each

week.

Consumer Crunch

The prospect of scores of

consumers missing work and

forfeiting paychecks also bodes

The bullion is still up more than 20% over the past 12 months. Gold is extracted from metal waste.

PATRICK HERTZOG/AFP/GETTY IMAGES

had notched since the 2016

presidential election.

Here is a look at how banks

could fare:

Lower Loan Revenue

Around two-thirds of banks’

revenue last year came from in-

terest earned on loans and se-

curities, according to data from

the Federal Deposit Insurance

Corp. The rates banks charge

on some large categories of

loans, including commercial

lending and credit-card bal-

ances, are tied to benchmarks

that have fallen in recent

weeks. That threatens to crimp

banks’ net interest income.

For instance, a reduction of 1

percentage point in both short-

and long-term interest rates

translates to $6.54 billion in lost

interest income in 2020 for

Bank of America Corp., or

roughly 7% of annual revenue,

Continued from page B1

Everything

Turns Bad

For Banks

seeks to exploit pricing gaps

between Treasury securities

and futures, and “risk parity

funds,” which try to score

strong performance with mod-

erate risk using futures con-

tracts that can boost the re-

turns of low-risk assets.

On Thursday morning,Bank

of AmericaCorp. warned cli-

ents that the unwind of several

leveraged trading strategies

risked creating “a cascading ef-

fect whereby U.S. Treasury

yields rise sharply and force

liquidations from other similar

investors.”

Thanks to the disruption of

short-term funding, securities

dealers could be left with $300

billion of 30-year Treasurys on

their books whose ultimate sale

would cause U.S. Treasury

yields to rise sharply, poten-

tially forcing further unwinds

and worsening conditions

throughout financial markets,

analysts at Bank of America

and JPMorgan say.

The risk parity strategy is in-

tended to adapt to market con-

ditions and be a one-stop shop

for investor assets. Firms in-

cludingBridgewater Associ-

atesLP andAQR Capital Man-

agementLLC are the leading

investors in the strategy.

Bridgewater founder Raymond

Dalio says he helped invent the

risk-parity category nearly two

decades ago and in the past has

told clients he has the majority

of his net worth invested in the

strategy. A spokesman for

Bridgewater wouldn’t comment.

Continued from page B1

Traders

Unwind

Strategies