20 ★ Thursday12 March 2020
Vivek Bommi
Markets Insight
Apache,Marathon Petroleum nda Noble
Energy ed the S&P 500 fallers as a driftl
lower for oil prices led traders to retread
the existential questions overhanging the
exploration sector.
Occidental Petroleum ollowed thef
pack lower following its dividend cut on
Tuesday with JPMorgan saying balance
sheet repair still needed asset sales,
which looked a challenge.
Cowen & Co analysts said no publicly
listed operator could hold production and
generate free cash in 2021, leaving a
“dearth of viable investment
opportunities”.
Boeing ropped on reports that itd
would this week draw down a $13.825bn
loan in full to cope with 737 Max aircraft
order deferrals and coronavirus
disruption.
MGM Resorts as weakest among thew
travel and tourism stocks after a horse
trainer at its Yonkers raceway in New
Jersey died from Covid-19.
Cruise ship operators continued to
slump withRoyal Caribbean Cruises,
Carnival nda Norwegian Cruise Line lla
sliding to decade lows.
GenMark ose after saying it hadr
applied to US regulators for emergency
approval of a test for the coronavirus.
Bryce Elder
Wall Street Eurozone London
hipmakerC AMS ropped after pricingd
its rights issue to partially pay for the
acquisition ofOsram t an 18 per centa
discount to Tuesday’s closing price.
AMS said it would raise €1.65bn with
the cash call, having previously targeted
an equity €1bn raise alongside €650m of
convertible bonds.
“The timing of the launch begs the
question as to what the company can see
in terms of demand,” said Barclays, which
argued that the company could have
funded the deal solely from borrowings.
AMS’s reiteration last week of first-
quarter targets was “out of step with its
lead customerApple nd others in thea
supply chain”, suggesting pain may be
felt in the second quarter, Barclays added.
Adidas ell after warning that first-f
quarter sales in China would be down by
€800m to €1bn due to the coronavirus.
Analysts saw the guidance as cutting
2020 consensus earnings forecasts by
about 15 per cent.
K&S f Germany led the Stoxx Europeo
600 gainers after the potash miner set
out plans to pay down debt by selling the
whole of its American salt mines business
by the end of the year, having previously
suggested only a partial sale.
Analysts saidthis would make K&S a
cleaner consolidation target.Bryce ElderBT ed the FTSE 100 gainers in responsel
to the Budget announcement of
investment in broadband worth £5bn to
help connect rural areas, which had been
flagged in the Conservative manifesto.
The chancellor also promised a
“fundamental review” into all business
rates for the Autumn Budget, raising the
prospect that fibre-to-the-premises
connections may be exempted.
Balfour Beatty umped on better thanj
expected full-year results and unchanged
2020 guidance with analysts welcoming
an improved free cash flow performance.
Sector peerCostain lid after revealings
plans to reinforce its balance sheet with a
£100m rights issue.
G4S it its lowest level since 2003 afterh
full-year results from the security
services group showed margins
deteriorating in the second half.
Citigroup turned cautious on G4S,
saying its move away from cash handling
and relatively high debt ratios deserved a
deeper discount to peers.
Finablr it a record low afterh NMC
Health, its sister company, revealed
overnight that it had found $2.7bn of
debt previously hidden from the board.
Aveva, the design software maker, fell
on worries about its exposure to oil and
gas capital expenditure.Bryce Elder3 Wall Street stocks slide on lack of
detail over more Washington stimulus
3 Asia-Pacific equities set the tone for
weaker global markets
3 Brent crude stuck beneath $40 as
Saudi Aramco ramps up oil production
Wall Street stocks were down more than
4 per cent by midday, chipping away at
the previous day’s rally, with analysts
warning that further declines lay ahead
due to the mounting coronavirus crisis.
TheS&P 500 indexfell 4.5 per cent,
having ended a volatile session 4.8 per
cent higher on Tuesday after President
Donald Trump pledged a “very dramatic”
package of measures to combat the
economic effects of the illness.
Those gains proved shortlived, in part
because theUS presidentfailed to
divulgemore details on those plans.
“A gap may be about to open up
between US and European market
performance, reflecting the lack of policy
action from the US government,” said
Seema Shah, chief strategist at Principal
Global Investors.
The now-familiar nerves were also
evident in European bourses, many of
whichslid yesterday. Theregion-wide
Stoxx Europe 600fell 0.7 per centwhile
London’s FTSE 100 dropped 1.4 per cent.
Early in the European trading session,
the Bank of England delivered a surprise
series of measures to tackle the impact of
the coronavirus, including chopping the
main interest rate by half a percentage
point.
Paul Dales, chief UK economist at
Capital Economics, said the BoE had
“pulled the trigger on its double-barrelled
shotgun”.
Stock markets in Asia-Pacific were also
weaker. Australia’s S&P/ASX 200 slid 3.
per cent even after the government
announced a $1.6bn health package to
combat the spread of coronavirus.
Hong Kong’s Hang Seng slipped 0.
per cent while China’s CSI 300 index
dropped 1.3 per cent.Meanwhile, oil prices fell afterSaudi
Aramco nnounced that it would increasea
its crude production capacity from 12m to
13m barrels per day, marking a further
escalation of Saudi Arabia’s price war.
International benchmark Brent crude
was down 3 per cent to $36 per barrel.
Haven assets rallied, signalling
investors remained risk-averse.
Yields on 10-year US Treasuries
reached 0.83 per cent,reflecting solid
support for core government bonds. But
gold, another haven asset, slipped 0.3 per
cent to $1,644 per ounce.Anna GrossWhat you need to know
Wall Street slides on fading hopes of swift fiscal stimulus
Source: BloombergIndices rebased Mar MarS&P Nasdaq CompositeDow Jones Industrial AverageThe 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 2777.08 1300.82 19416.06 5876.52 2968.52 87232.
% change on day -3.65 -0.73 -2.27 -1.40 -0.94 -5.
Currency $ index (DXY) $ per € Yen per $ $ per £ Rmb per $ Real per $
Level 95.997 1.128 104.845 1.289 6.950 4.
% change on day -0.433 -0.617 1.055 -0.386 0.039 0.
Govt. bonds 10-year Treasury 10-year Bund 10-year JGB 10-year Gilt 10-year bond 10-year bond
Yield 0.837 -0.744 -0.068 0.292 2.673 7.
Basis point change on day 19.490 5.000 -2.120 5.500 5.700 13.
World index, CommodsFTSE All-World Oil - Brent Oil - WTI Gold Silver Metals (LMEX)
Level 313.98 36.15 33.33 1655.70 17.07 2590.
% change on day -3.15 -4.29 -4.36 -1.00 1.10 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 Mar2560288032003520| |||||||||||||||||||
Jan 2020 Mar1280144016001760| ||||| |||||||| ||||||
Jan 2020 Mar5760640070407680Biggest movers
% US Eurozone UK
UpsWillis Towers Watson 3.
Gilead Sciences 2.
Aon 2.
Dxc Technology 2.
Amgen 0.Commerzbank 5.
Caixabank 4.
Intesa Sanpaolo 4.
Telecom Italia 3.
Linde 3.Bt 2.
Schroders 2.
Hsbc Holdings 1.
Land Securities 1.
Rsa Insurance 1.
%
DownsApache -17.
Occidental Petroleum -16.
Norwegian Cruise Line Holdings Ltd -14.
Noble Energy -14.
Mgm Resorts Int -12.
Prices taken at 17:00 GMTAdidas -9.
Oci -8.
Adp -6.
Hugo Boss -5.
Natixis -4.
Based on the constituents of the FTSE Eurofirst 300 EurozoneAveva -9.
Coca-cola Hbc Ag -8.
Easyjet -7.
Kingfisher -6.
Smiths -5.
All data provided by Morningstar unless otherwise noted.A
mid all the drama in finan-
cial markets over the past
couple of weeks, it has
been easy to overlook one
knock-on effect that could
meaningfully influence global flows in
corporate bonds. That is, the substantial
decline in the cost of hedging US dollar
exposure out of US credit investments.
This makes US high-yield bonds, in
particular, appear much more attrac-
tive to UK, European and Japanese
investors — which could release a lot of
pent-up demand.
The past few years have been a frus-
trating period for non-US investors
seeking income. For much of that time,
the European high-yield market has
offered a yield of 2-4 per cent while the
US market has offered 5-7 per cent. On
the face of it, you could go to the US
market and get double the yield.
In reality, you could get that onlyif
you also took on the US dollar exposure
that comes with US investments. But
currencies can be very volatile. The
unhedged approach is normally for the
brave or the careless.
Hedging currency exposure involves
selling one currency to buy another. If
you are a euro-based investor who
wants to hedge US dollar exposure, you
would sell enough US dollar exposure to
cover the value of your investment and
buy euro exposure with the proceeds.
That incurs costs. Some of that cost
comes from the “cross-currency basis”,
which is essentially the premium you
pay to buy a currency in high demand.
But most of the cost comes from the
difference between the short-term
interest rate you receive when you are
holding one currency and the short-
term interest rate you pay out when you
are selling another.Those rates are indirectly linked to
the currencies’ respective central bank
policy rates. The US Federal Reserve
started raising rates at the end of 2015
and reached 2.5 per cent by the middle
of last year.
By contrast, the Bank of England has
raised rates twice since 2016 but still only
got to 0.75 per cent — and reversed the
whole lot on Wednesday with an emer-
gency cut. The European Central Bank
has been stuck below zero for four years.
If you were selling US dollars between
2015 and 2019, then, you were paying
out a higher and higher interest rate —
while the rate you received went
nowhere. For euro and sterling-basedinvestors holding currency-hedged US
assets, the net cost peaked at a yield-
eroding 3.6 per cent and 2.1 per cent,
respectively.
That is enough to cancel out all of the
extra yield you got from buying US
rather than European high-yield bonds.
But those costs declined steadily for
the nine months before last week’s
aggressive,half a percentage point cut
by the Fed. And after the Fed moved,
they dropped precipitously.
By Wednesday, the cost of hedging US
dollar exposure had fell below 1 per cent
for euro investors and to just0.12 per-
centage points for sterling investors.
At the same time, US high-yield bonds
have sold off harder during the corona-
virus crisis than European high-yieldbonds, where issuers tend to be of
higher quality, and less cyclical.
As a result, in their own currencies the
US high-yield market still offered some
2.5 percentage points more yield than
the European high-yield market.
Even when you factor in the cost of
hedging, then, you now get almost 2 per-
centage points of yield by switching
from European to US high-yield bonds.
To put it another way, a hedged euro-
based investor in the US high-yield bond
index got a yield of around 2.4 per cent
before coronavirus hit the headlines
and the Fed cut rates — but now gets
more than 6 per cent.
Is this likely to reverse soon? We
doubt it. It is difficult to imagine either
the Fedraising rates by half a percent-
age point ver the coming weeks or theo
already minimal short-term rates asso-
ciated with the euro and sterling going
much lower relative to dollar rates.
In fact, interest rate markets are
forecasting that the Fed is on its way
back to zero. That would likely reduce
the cost of hedging dollars to euro to
about 0.5 per cent while completely
erasing the cost of hedging dollars to
sterling.
Clearly, the situation isvolatile. Rela-
tive value in local currency yields may
change as markets react to the spread of
coronavirus. But it is fair to say that
currency-hedging costs should no
longer present an obstacle for investors
looking to allocate to US fixed income.
We think that flows into US assets
could pick up substantially once this
reality sinks in and as investors reassess
the relative value on offer across
developed market bonds.Vivek Bommi is a senior portfolio manager
at Neuberger Berman in LondonDrop in hedging costs
makes US high-yield
bonds a bargain
Currency-hedging costs
should no longer present
an obstacle in allocatingto US fixed income
Global Appointments
MARCH 12 2020 Section:Markets Time: 3/202011/ - 18:21 User:stephen.smith Page Name:MARKETS2, Part,Page,Edition:EUR , 20, 1