Wall St.Journal Weekend 29Feb2020

THE WALL STREET JOURNAL. ** Saturday/Sunday, February 29 - March 1, 2020 |B11

BYDAVIDHODARI

The currency rose despite the spread of the coronavirus in Italy. Above, tourists in Milan on Friday.

LUCA BRUNO/ASSOCIATED PRESS

STREETWISE|By James Mackintosh

As Markets Fall, Ask if Now Is the Time to Buy

Investors fi-

nally capitu-

lated on Fri-

day, starting

by dumping

everything be-

fore a partial recovery, in

what might mark at least a

short-term end to the mar-

ket’s steep selloff.

In the bizarro world of Fri-

day’s coronavirus fears, the

price of safe-haven gold fell,

and cruise line stocks rose,

even as the overall market

continued its astounding sell-

off. Both are signs of a rush to

liquidate holdings, closing out

what had been profitable

trades such as owning gold or

betting against cruise stocks.

The question now is

whether the capitulation

marks a good time to buy.

We can divide the issue

into two: whether the bounce

from Friday’s low will con-

tinue, which depends in large

part on technical issues, and

whether the tumble into a

correction is justified by fun-

damentals for the longer run.

As things stood early Fri-

day morning, the market tech-

nicals didn’t suggest a full-

blown panic quite yet,

although several buy signals

were flashing. But panic en-

sued at the open, with the

stocks that had best resisted

the selloff being dumped, in-

cluding Gilead Sciences, one

of only two S&P members

that had gained since the in-

dex peaked last Wednesday.

Gold, similarly, fell as inves-

tors sold out of the traditional

haven that had made them

money.

The winners included many

of the stocks hit hardest by

virus fears, such as Norwegian

Cruise Line Holdings (up 7%

on Friday), Carnival Corp,

owner of the Diamond Prin-

cess (up 5%) and a group of

highly leveraged oil stocks.

Such market dislocations

often mark a short-term bot-

tom, as traders close out their

bets. Whether this is a good

time for an investor to buy

depends much more on funda-

mentals than short-term tech-

nicals, however. Taking a lon-

ger-term view means trying to

assess how much damage the

virus will do to profits and

the economy.

The starting point should

be positive: Barring some

apocalyptic mutation, a pan-

demic will be over within a

few months, and growth

should resume. There will be

lingering effects on the econ-

omy’s growth rate as compa-

nies respond by diversifying

supply chains, as well as po-

tential changes in consumer

behavior (anyone fancy a

cruise?). But they are unlikely

significantly to hamper long-

term growth.

Stocks are meant to be the

discounted value of future

profits, and with the bond

yield so low future profits are

worth a lot. Even if a couple

of quarters of profit were en-

tirely wiped out—and they

won’t be for most compa-

nies—that would justify only a

relatively small drop in share

prices, so long as profits were

expected rapidly to get back

to normal and companies had

enough cash and access to

new finance to get through

the rough patch.

Those caveats are impor-

tant. Uncertainty about

whether profits will fully re-

cover would justify lower

share prices, as would uncer-

tainty about whether weaker

companies will be driven out

of business. But the deep un-

certainty about the survival of

the U.S. banking system that

drove stocks down more than

50% in the 2007-09 global fi-

nancial crisis is unlikely to be

repeated, as banks and regula-

tors are far better prepared.

There is no shortage of debt.

One obvious economic dan-

ger is that the damage be-

comes self-fulfilling. Compa-

nies are already having supply

troubles because of the China

shutdown; if they respond by

laying off workers, demand

would also be hit. Central

banks are more limited in

their ability to stimulate by

cutting rates than in past re-

cessions (although futures

markets are now pricing a

Federal Reserve cut at next

month’s meeting, with most

expecting a 0.5 percentage

point cut).

Much will depend on how

willing governments are to

provide fiscal support. My

guess is that governments will

be willing to loosen the purse

strings, as Hong Kong and

South Korea already have, but

history suggests the U.S. and

Europe are likely to be slow to

respond and impeded by po-

litical differences.

A second risk for investors

is that governments in the

West choose to sacrifice eco-

nomic growth to try to slow

the spread of the virus, as

China did. Widespread school

and office closures and quar-

antining of cities might slow

the outbreak a little, but

would deepen the economic

damage. Japan is already go-

ing this way.

The final risk to the econ-

omy is of widespread fear

among the public. If house-

holds stop going to crowded

places, it isn’t only theaters

and sporting events that suf-

fer; overall demand will crater

and recession will become

more likely. Stocks typically

fall hard in a recession, what-

ever the cause.

I suspect a short-term

stock rebound is likely, be-

cause markets rarely fall so

far and fast without what

London traders charmingly

call a dead-cat bounce.

After that, my big worry is

that investors still aren’t pre-

pared for a full pandemic.

We’re still a long way from

the sort of headlines we saw

in the 1918 Spanish flu pan-

demic, when the Boston stock

exchange shut, the Supreme

Court took an extended break

and tens of millions caught

the disease. Coal, steel and

textile production was hit,

while shops suffered both

from caution among custom-

ers and, in some cities, forced

closures by the authorities.

Stocks rarely fall so

far and fast without

what traders call a

dead-cat bounce.

Customers of Vanguard
Groupand Fidelity Invest-
mentshad trouble accessing
online accounts on Friday
morning, angering investors
who couldn’t trade as stock
markets fell.
The market turmoil sent a
surge of people rushing to log
on to the firms’ websites to
try to cash out, buy stocks at
discounted prices, or check
how much their investments
were worth. Some customers
took to social media to voice
frustrations that they couldn’t
access their accounts.
The outages were brief. A
Vanguard spokeswoman said
the site was down for three
minutes on Friday morning, a
time that the firm saw an in-
crease in website traffic and
call volumes.
“Due to the steep market
decline, we had a lot of clients
attempting to log in and call
us, so it was an increase in ac-
tivity from what we typically
are used to,” she said.
Some of Fidelity’s clients
lost online access to their ac-
counts for several minutes on
Friday morning, a firm spokes-
man said.
The technical issues, even if
short-lived, raise questions
about whether big money
managers and brokerage plat-
forms have the technology
systems to withstand a spike
in trading—or even customers’
interest in monitoring their
life savings—if the volatility
gets worse.
What is at stake with these
outages is millions of inves-
tors’ trust in the investment
firms and the plumbing under-
lying markets. Vanguard and
Fidelity manage trillions of
dollars.
“Whether it’s 9/11, Brexit or
coronavirus, investment firms
need to make sure they can
handle the volume of inquiries
and operational require-
ments,” said William Trout, a
wealth and asset-management
technology adviser at Celent, a
research firm.
“If they don’t, they are go-
ing to have operational issues,
but more importantly, suffer
reputational damage and loss
of confidence from the inves-
tor community.”
As the S&P 500 fell, Van-
guard clients complained that
the firm’s site was down and
Fidelity customers griped that
they couldn’t execute trades or
see their account balances and
investment positions.
This isn’t the first time that
Vanguard and Fidelity custom-
ers complained about online
access to their accounts.

BYDAWNLIM
ANDJUSTINBAER

Vanguard,

Fidelity

Suffer

Outages

U.S. oil prices had their
worst week since 2008, when
the global financial system was
melting down, as the coronavi-
rus-driven selloff in risky as-
sets accelerated.
West Texas Intermediate,
the U.S. crude benchmark, fell
4.95% on Friday to close at
$44.76 a barrel, the lowest
price in over a year. Friday’s
decline contributed to a weekly
loss of 16.15%, the biggest
weekly decline since December
2008.
Brent, the international oil
price gauge, lost 3.18% on Fri-
day to settle at $50.52 a barrel.
In early trading Brent dropped
below $50 a barrel for the first
time in 2½ years. It lost 13.64%
for the week.
“There is now the real dan-
ger of a major economic shut-
down in large parts of the

we’re not seeing a sufficient

production cut,” said Xiao Fu,

head of commodities research

at BOCI Global Commodities.

Some traders are optimistic,

though. “I think they’ll surprise

the market as OPEC’s been ab-

normally quiet even as oil’s

been falling like a hot knife

through butter,” said Global

Risk Management’s Mr. Mar-

shall. “The fireworks will come

out on Thursday, but until then

it’s free fall.”

MARKETS

world as the coronavirus is

now spreading rapidly, with a

potential huge downward im-

pact on oil demand,” said Fer-

eidun Fesharaki, chairman of

FGE, an energy consulting

group.

Italy’s coronavirus outbreak

is being linked to more infec-

tions around Europe, prompt-

ing nations and corporations to

scale down travel. European

budget airlineeasyJetbecame

one of the growing list of air-

lines to cut back on continental

flights, canceling some of its

flights to and from Italy for the

second half of March.

“We’re still in the fear phase

with [coronavirus] cases rising

across Europe,” said Edward

Marshall, a commodities trader

at Global Risk Management.

Assets exposed to oil also

received a hammering from

anxious investors.

The currencies of major oil

exporters—the Russian ruble,

Norwegian krone and Canadian

dollar—lost ground against the

U.S. dollar, while the Japanese

yen, considered a haven asset,

rose.

Oil and gas stocks were

Oil Logs Its

Worst Week

Since 2008

Assets exposed to oil

also received a

hammering from

anxious investors

routed. Those in the Stoxx Eu-

rope 600 index lost 3.8% on

Friday and 13% on the week.

U.S. energy companies in the

S&P 500 gained 1.25% Friday

on a end-of-session climb but

still dropped 15% during the

week.

U.S. major oil companies

ChevronCorp. and ExxonMo-

bilCorp. lost 14% and 13%, re-

spectively, for the week.

Smaller producers generally

fared worse.Whiting Petro-

leumCorp., which drills in

North Dakota, shed 33% this

week while Oklahoma City’s

Chesapeake Energy Corp.

shares lost 39%.

“It’s about survival and you

want to own the companies

you think will be around,” said

RBC Capital Markets equity re-

search director Biraj Borkha-

taria.

The Organization of the Pe-

troleum Exporting Countries

and its allies are due to meet

the coming week in Vienna. At

issue is whether Saudi Arabia,

the de facto leader of OPEC,

will be able to convince Russia,

the chief ally outside the cartel,

to deepen the alliance’s four-

year-old production cuts. A

joint technical committee

meeting earlier in February

recommended deepening cuts

but Moscow has demurred.

“There are two fears hitting

oil: one is risk-off selling across

assets and at the same time

OPEC and its allies are due to meet the coming week in Vienna to consider deepening the alliance’s four-year-old production cuts.

NICK OXFORD/REUTERS

Some analysts and inves-

tors have been puzzled this

year by the euro’s persistent

weakness when many of the

traditional drivers of the cur-

rency have been improving.

The difference between inter-

est rates in the eurozone and

the U.S. has shrunk, which in

theory should make the dollar

less attractive.

At the same time, the euro-

zone has enjoyed growing cap-

ital inflows despite its growth

problems.

Since its recent low on Feb.

20, the euro has risen 2.4%

against the dollar to $1.104. It

has jumped 5.9% against the

rand and 7.8% against the peso

over the same period.

This is similar behavior to

currencies more traditionally

seen as so-called havens,

which investors buy when the

world looks riskier, such as the

Swiss franc and Japanese yen.

The franc is up 2% against the

dollar since Feb. 20, and the

yen is 3.1% higher.

The previous weakness and

surprising strength now is in

part likely due to hedge funds

selling euros and buying

higher-yielding currencies

such as the peso and rand,

then reversing those trades

this week.

Leveraged investors had

been increasing their bets

against the euro in February,

according to weekly net expo-

sure data in futures markets

from the Commodity Futures

Trading Commission, which is

one indication that they were

pursuing such carry trades.

However, other forms of

borrowing in euros by non-Eu-

ropean investors—through

banks or bond markets—have

also surged in the past few

years, according to analysts,

which is having a similar ef-

fect on the euro.

However, another important

dynamic at play is the end of

the month, when some inves-

tors look to balance their

books and some banks call in

short-term loans.

A lot of this week’s euro

rally could be investors closing

out bets against the currency,

according to Kit Juckes, a cur-

rency strategist at Société Gé-

nérale.

“The market was clearly

short euros and there is very

likely to be buying related to

short covering at month-end,”

Mr. Juckes said.

Either way, the euro is

likely to weaken against the

dollar again next week, ac-

cording to analysts. Nomura’s

Mr. Rochester said the risks to

the eurozone are still higher

than the risks to the U.S.

The euro has rallied against

the dollar this week, contrary

to what might be expected in a

weak economy that has the

biggest outbreak of coronavi-

rus outside of Asia.

Investors have piled into

the common currency, driving

it 1.8% higher against the dol-

lar since the end of last week.

But they haven’t been buying

the euro because they think

the eurozone is on course for a

turnaround, or because Europe

has suddenly become a haven

for funds when global risks es-

calate.

In fact, the reason for these

counterintuitive market

moves, according to some ana-

lysts and investors, is the

carry trade: Investors who

were borrowing cheap euros

to invest in riskier assets are

now, amid the recent market

turmoil, selling those assets to

buy back euros and unwind

their trades.

“Markets are not always ra-

tional,” said Jordan Rochester,

a foreign-exchange strategist

at Nomura Holdings. “We have

a situation developing in Italy

right now with cases getting

higher, but the euro moving

upwards. This is a washout of

positions of carry trades.”

BYPAULJ.DAVIES

ANDANNAISAAC

Euro’s Surge Shows Power of Carry Trades Unwinding