Financial Times 27Feb2020

Thursday 27 February 2020 ★ FINANCIAL TIMES 19

MARKETS & INVESTING

TO M M Y ST U B B I N GTO N— LO N D O N
C O L BY S M I T H— N E W YO R K

As the spread of coronavirus rattles
markets, investors are betting that
centralbankswillcometotheiraid.

Traders have this week dialled up
expectations for rate cuts from the US
Federal Reserve and other central
banks, wagering that they will repeat
the response to turbulence that has
become familiar since the financial
crisis.
Markets are pricing in more than two
cuts by the Fed over the coming 12
months, implying a reduction of at least
half a percentage point from the current
level of 1.5-1.75 per cent.
The consensus at the start of the year
was that even a single cut was not a done
deal. That shift, along with a flight into
safe assets, helped push the 10-year US
Treasury bond yield to an all-time low
on Tuesday.
“The whole global growth picture
has changed for the worse,” said Chris
Iggo, chief investment officer for core
investments at Axa Investment
Managers.
“I’m not sure what [the Fed] had in
mind two months ago is still as relevant
today,” he added. “The Dow down 900

points is something that makes them sit

up and take notice.”

Fed policymakers have given no

indication of a shift in policy.

Vice-chairman Richard Clarida said

on Tuesday that the virus would have a

“noticeable’’ impact on China growth,

which could spill over to the rest of the

world. “But it is still too soon to even

speculate about either the size or the

persistence of these effects, or whether

they will lead to a material change in the

outlook.”

It is still unclear how supply chains

could be affected or how large a drag the

outbreak could be on growth. “It’s a dif-

ficult situation for [the Fed], because

they’d like to see more clarity on the

economic front and, right now, there

isn’t a whole lot of economic data to con-

firm how bad the coronavirus could be,”

said Kathy Bostjancic, chief US financial

economist at Oxford Economics.

The Fed might be more hesitant to

ease policy further, she added, given

that it had indicated at the end of last

year that it sought to remain on hold and

see the impact of the cumulative 0.

percentage points it cut between July

and October in 2019.

Investors have focused attention on

the Fed in part because it is rare among

developed world central banks in

having significant space to lower

interest rates.

But even the European Central Bank,

which cut its deposit rate to minus 0.

per cent last September, is priced for a

further 10th of a percentage point cut

this year.

At the start of the year, investors had

begun tentatively pricing in rate rises in

2021. Germany’s government bonds,
      which serve as a benchmark for all
      eurozone debt, trade at sub-zero yields
      up to maturities of 30 years.
      The resurgent expectations for mone-

Fixed income

Traders bargain on virus rate cuts by policymakers

E VA SZ A L AY— LO N D O N

A UK court has declined a request from

some of the world’s largest investors

who were seeking to force a group of

banks to widen a search for data about

theircurrenciestradingbusinesses.

In a claim submitted in January this

year, a group of investors includingAlli-

anz,Pimcoand hedge fundBrevan

Howardfiled a lawsuit alleging that the

actions of 16 banks had damaged them

more extensively and over a longer

period than regulators have already

taken into account when levying fines.

In a two-day hearing ahead of the UK

trial, lawyers for the investors said

banks includingBarclays,JPMorgan

andRBSshould conduct a new search

for material to show potential misbe-

haviour by traders.

They wanted banks to widen out the

search to include derivatives contracts

and to cover the period between 2002

and 2005, which have not yet been cov-

ered in regulatory investigations.

In May last year, the European Com-

mission issued more than €1bn in fines

for anti-competitive behaviour in cur-

rencies trading with traders attempting

to manipulate markets in Bloomberg

chat rooms called “Three Way Banana

Split” and “Essex Express”.

Lawyer Marie Demetriou argued on

behalf of the investors that they were

unable to assess any damages they may

have suffered without the additional

data but she said their estimate puts the

value of affected trades at $68tn.

Banks rejected the notion they should

conduct an additional investigation into

their operations for the earlier years

with lawyers noting the tens of thou-

sands of pages of documents that had

already been required to comply with

regulatory investigations focusing on

the period between 2007 and 2013.

After two days of legal arguments, the

judge refused the investors’ request but

ordered that banks should hand over all

the materials, including chats, emails

and trade data that they know contain

evidence of wrongdoing in the six years

that regulators previously investigated.

The judge also ordered that banks

should hand over some limited material

for the earlier years but far shy of what

investors had demanded. The court left

open the possibility of widening the dis-

closure exercise further in the future.

Currencies

Investors fail in UK legal bid to

force FX disclosure from banks

Markets are pricing in two or more

cuts by the Fed in the next 12 months

FastFT

Our global

team gives you

market-moving

news and views,

24 hours a day

ft.com/fastft

E VA SZ A L AY

Some of Australia’s top investors are still
bearish on their country’s currency,
which has been rooted near a post-crisis
low on a combination of fears over
wildfires and the impact of the big
slowdown in China.
The Aussie dollar hit a new 10-year
low against the US dollar last week,
shedding some 0.8 per cent in a single
day after unemployment in January
ticked slightly higher.
While the data fell short of expecta-
tions by just a small margin, the reac-
tion was significant — in line with recent
trading patterns where the exchange
rate responds to negative news while
shrugging off brighter developments.
The currency, which is historically
highly sensitive to commodity prices
and economic developments in China,
has lost more than 15 per cent of its
value against the US dollar in the last
two years with one Aussie dollar worth
just$0.65 compared with $0.78 at the
start January 2018. Since the start of
2020, losses have accelerated further.
“There remains little to like about the
Australian dollar,” said Andrew Fisher,
head of asset allocation at Brisbane-
based pension fund Sunsuper, which
had A$70bn (US$46bn) of assets under
management last October.
The outbreak of coronavirus is likely
to have a severe impact on Chinese eco-
nomic growth prospects and, in turn,

those of Australia. Disappointing data

has further bolstered views that the

country’s central bank will be forced to

cut rates this year from already record

low levels.

Domestic growth is anaemic, notch-

ing up just 0.4 per cent expansion in the

third quarter of last year and likely to

slow further.

The result is that moves in the

currency have become increasingly

asymmetric, said Stuart Simmons, a

senior portfolio manager at QIC, a Bris-

bane-based pension fund with about

A$80bn of AUM as of June last year.

“When stocks rally, the performance

of the Australian dollar is ambiguous,

but when there’s a downturn, the

currency’s sensitivity spikes and it

follows risk assets lower,” he said.

He noted that this behaviour is typical

of the end of economic cycles.

Another historical correlation has

recently broken down. When the dollar

gains against the Japanese yen, the

Australian dollar tends to move higher

against its US peer as the pattern

normally means a warming of investor

sentiment, said Stephen Gallo, Euro-

pean head of currency strategy at BMO

Capital Markets.

Instead, the surge higher in the US

currency on February 20 came while the

Aussie dollar plunged.

“The standard relationship... has

utterly collapsed,” said Mr Gallo.

One factor contributing to the break-

down of traditional patterns is the unu-

sual backdrop in global interest rates.

In the past, large local investors such

as pension funds bought Australian

dollars to hedge international invest-

ments because they feared missing out

on relatively high rates back home.

But since May 2018, this relationship

has been turned on its head. Key rates in

the US have been higher than in Aus-

tralia, creating incentives for investors

to leave money in the US dollar rather

than swapping them for the Aussie.

This trend has meant fewer buyers for

the Aussie and led to the “death of the

carry trade”, according to Mr Simmons.

“If anything [the situation] is becom-

ing worse for the Australian dollar with

the correlation to risk assets remaining

strong to the downside while being

weaker to the upside more recently,

making foreign currency even more

attractive,” said Mr Fisher.

The Reserve Bank of Australia has

done its best to stir economic activity,

making three cuts to interest rates last

year to a record low of 0.75 per cent.

The central bank stood firm at its pol-

icy meeting this month but analysts see

more cuts down the road, possibly as

soon as March 3 as the coronavirus

continues to drag down growth in China,

the country’s top trading partner.

Analysts worry that growth in Asia’s

biggest economy could halve in the first

quarter from a rate of 6.1 per cent in

2 019.

As a result of possible rate cuts from

the RBA and the lack of investor interest

in buying the currency, both Mr

Simmons and Mr Fisher remain bearish

on the Aussie dollar’s prospects.

Carl Astorri, head of asset allocation

and research at Australian Super, the

country’s largest pension fund with

A$166bn of AUM last June, is “not as

negative” on the currency as he had

been a year ago, citing more stimulative

monetary policy and better momentum

in commodity prices.

“However, we do remain negative in

part because of the impact of the

coronavirus on the Australian economy

and also because the market could be

underpricing the potential for further

rate cuts,” he said.

Falling interest rates deter

buyers for the Aussie as fears

grow over China slowdown

‘When

there’s a

downturn,

the Aussie’s

sensitivity

spikes and it

follows risk

assets lower’

Pessimism on

Australia’s

economic

prospects is

weighing on

the country’s

currency

Peter Parks/AFP/Getty

Currencies.Bearish sentiment

Demise of carry trade spells

gloom for Australian dollar

J O E R E N N I S O N— LO N D O N

The Bank of England moved yesterday

to “turbo-charge” banks’ move away

from Libor by toughening the terms of

its lending against the tainted interest

rate benchmark.

The BoE will apply a discount from

October to the value of Libor-linked

collateral that commercial banks can

post to secure loans.

This so-called haircut, the gap

between what the central bank accepts

as collateral and what it will lend, will be

ratcheted up ahead of the deadline to

switch away from Libor at the end of

2021.

The central bank also intends to pub-

lish a compounded index — in addition

to the overnight rate — for the new

benchmark, the Sterling Overnight

Index Average, or Sonia.

The index, which will be available

from July, is a crucial tool for corporate

borrowers, helping them to shift bonds

and loans over to the new benchmark

with predictable interest payments over

time, rather than being subject to daily

fluctuations in the overnight rate.

“These initiatives are aimed at turbo-

charging sterling transition, helping

the market deliver against its commit-

ment to transition away from Libor

and further de-risking sterling mar-

kets,” said Andrew Hauser, executive

director for markets at the BoE, in a

speech yesterday.

Some transactions have been already

executed using a compounded interest

rate but its calculation can cause prob-

lems, especially when different players

disagree on the precise interest rate.

“The production of an index, a golden

source, will massively help people scale

up,” said Catherine Wade, a capital

markets lawyer at Linklaters in London.

Regulators have been ramping up the

pressure on banks and other financial

markets participants to move away

from Libor, which underpins roughly

$400tn of products around the world

from loans to derivatives contracts.

Scandals have damaged Libor with

banks and brokers paying nearly $10bn

in penalties for trying to manipulate it.

Its relevance has further diminished

due to a “chronic lack of underlying

transactions”, said Mr Hauser. “Indeed,

its continued existence poses material

risks to financial stability, both in the

UK and globally,” he added.

Mr Hauser warned that, despite

progress in 2019 — with roughly half of

all interest rate swap derivatives con-

tracts now referring to Sonia — there is

much to be done.

In particular, sales of cash bonds and

loans are overwhelmingly tied to Libor.

The BoE has set a deadline of the third

quarter to end new issuance of Libor-

linked debt, making the availability of a

new compounded interest rate even

more important.

Fixed income

BoE penalises

Libor-linked

collateral to

spur switch

‘Libor’s continued

existence poses material

risks to financial stability,

in the UK and globally’

Australian dollar has lost more than a third of its value

since  peak

Source: Refinitiv

US per A













         

tary easing contrast with a widespread

belief following 2019’s bond rally that

central banks were largely out of ammu-

nition and were likely to pass the baton

to government spending when it came

to stimulating economies.

“The reaction we have seen demon-

strates that central banks are still

the only game in town,” said Antoine

Bouvet, senior rates strategist at ING. “A

shift towards fiscal policy was also going

to be a gradual one that occurred over

many years.”

Mr Bouvet said rate cuts were

unlikely to do much to address the fall-

out from the coronavirus.

“The markets are tending towards

this response because they are used to it

and it’s probably the fastest policy

response to put into practice,” he added.

“But it’s not the most useful tool for

addressing a crisis like this.”

In the UK, a borrowing and spending

boost is expected in next month’s

Budget and investors are betting that

this will happen in tandem with lower

interest rates.

Markets are pricing slightly more

than one Bank of England cut this year.

UK gilt yields are close to all-time lows

with the 10-year bond trading at a yield

of 0.52 per cent yesterday.

FEBRUARY 27 2020 Section:Markets Time: 26/2/2020 - 18: 47 User: stephen.smith Page Name: MARKETS1, Part,Page,Edition: ASI, 19, 1