Wednesday4 March 2020 ★ FINANCIAL TIMES 19
MARKETS & INVESTING
P H I L I P STA F F O R D— LO N D O N
R I C H A R D H E N D E R S O N— N E W YO R K
Trading volumes on stock and
futures exchanges surged in February
after fears over the impact of the
spreading coronavirus sent important
asset classes reeling.
Data from bourses showed that trading
flows jumped sharply last week when
the US benchmark S&P 500 stock index
tumbled more than 10 per cent from a
recent peak to record itsfastest correc-
tion ince the 1930s.s
Intercontinental Exchange, which
owns the New York Stock Exchange and
other platforms, said it handled a daily
average of 7.6m futures and options con-
tracts in February — a new monthly
record.
Deutsche Börse, the G erman
exchange group, said Friday had been
the heaviest day for share trading since
- Its monthly trading volume rose
60 per cent compared with 2019 to
€183bn.
CME Group, the world’s largest
futures exchange, said it had its busiest
day on record. “We saw a flight to qual-
ity,” said Derek Sammann, global head
of commodities and options products at
the CME. “People were getting out of
equities and into fixed income.”
During the shake-out in markets last
week, the S&P 500saw its biggest one-
day fall since 2011. Government bonds
rushed higher, driving the yield on the
benchmark 10-year US Treasury to a
record low below 1.3 per cent as inves-
tors sought safety in havens.
“It felt intense... our busiest week
ever,” said one European trader who
declined to be named. “It was record
day after record day, and each one
seemed to get bigger than the last.”Friday was the second-busiest trading
day on record in the US, according to
data from CBOE Global Markets. Turn-
over hit 19.35bn contracts, just behind
the 19.76bn level set in the depths of the
financial crisis in October 2008. Nearly
$1tn of shares changed hands.
Traders who had been betting on US
stocks tokeep rising were caught up“
with very long US equity futures posi-
tions into the correction and were
forced to unwind these positions
abruptly,” said Nikolaos Panigirtzoglou,
analyst at JPMorgan, in a note to clients.
The rapid shifts resulted in record
volumes in exchange traded funds.
State Street’s SPY, the world’s largest
ETF that tracks the S&P 500, hit a
record for the amount of value traded
for the day, which reached $113bn.
Bond ETFs, which trade on stock mar-
kets but consist of fixed income securi-
ties, also experienced a rush of activity.
Vanguard’s BND bond ETF, the second-
largest of its kind, hit a record for value
traded on Friday whileBlackRock’s
iShares AGG, the world’s largest bond
ETF, marked its second-biggest day.
Additional reporting by Robin Wiggles-
worth in OsloCross asset
‘Intense’ trading sends exchange
volumes surging in flight to havens
R O B E RT S M I T HFading demand for risky European
bank debt has undermined a new bond
from Greece’sPiraeus Bank, sending its
price below 80 cents on the euro less
than a month after it was issued.Strong appetite for riskier bank bonds
at the start of this year led to a spate of
deals from lenders that had previously
struggled to access the market.
Last month,Deutsche Bank uccess-s
fully issued its first “additional tier 1”
(AT1) bonds for six years, for example.
But the spread of oronavirus hasc
severely weakened bids for such bonds
in what analysts at CreditSights
described as a “gruelling week” for
European bank debt.
The sell-off threatens to inflict losses
on investors who have this year piled
into riskier bonds from financial institu-
tions at record-low yields.
While AT1 bonds were one of the best
returning fixed income assetslast year
— with ICE Bank of America’s index
posting total returns of more than 17.
per cent — investors are itting on lossess
so far in 2020.
Financial institutions issue differenttypes of debt that vary in terms of how
exposed they are to losses during a cri-
sis. The AT1 bonds at the bottom of this
capital structure are the most equity-
like because the bank can write them off
in times of stress and they have a perpet-
ual maturity, meaning the principal
does not need to be repaid.
Greece’s Piraeus Bank has none of
these riskiest bonds outstanding. How-
ever, the bank did sell €500m of “tier 2”bonds — which rank slightly higher than
AT1s — at a yield of 5.5 per cent on Feb-
ruary 12 after receiving more than
€3.5bn of orders.
On Monday, the bond’s price fell to
just 79 cents on the euro, meaning it has
lost more than one-fifth in value in a lit-
tle over three weeks. The bond’s yield
has limbed above 10 per cent.c
One hedge fund manager described
this as a “frankly shocking perform-ance” for such a recently issued bond.
He said demand from Asian investors
for riskier bank debt had helped fuel a
frenzy at the start of the year. “The
presence of Asian funds has been
marked on recent bank capital issues.
The reach for yield has been strong.”
Greece’s financial sector is still
extremely fragile with more than 40 per
cent of Greek banks’ loans considered
“non-performing” following the coun-
try’s deep financial crisis.
Investors have shown more willing-
ness to back Greek banks recently, how-
ever, as the EUrecently approveda
government scheme designed to help
lenders rid themselves of toxic assets.
Greece’sAlpha Bank, for example,
was able to issue €500m of tier 2 bonds
last month, which are now trading at 90
cents on the euro.
CreditSights data shows that Euro-
pean banks have issued over €10bn of
AT1 bonds this year. The highest pro-
portion has come fromItaly ith fourw
banks raising a total €3.5bn.
Intesa Sanpaolo ocked in the lowestl
coupon yet seen on an Italian AT1 bond
when it paid just 3.75 per cent to raise
€750m on February 20.Fixed income
Losses for Piraeus bond show impact
of virus on risky European bank debt
The bond’s price fell to 79
cents on the euro, losing
more than one-fifth invalue in over three weeks
Deutsche Börse had its heaviest day
of share trading since 2008 on FridayFastFT
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The sharp drop in the oil price since the
coronavirus outbreak has left US shale
producers hanging on for survival and
dependent on their big rivals in Opec to
come to their rescue.
US producers do not have a seat at the
Opec table but would cheer if the cartel
— due to meet in Viennathis week —
decides to deepen output cuts to prop up
the oil price. Saudi Arabia, the domi-
nant member of the group, is said to be
pushing to remove at least another1m
barrels f production a day.o
A lot of cash-strapped US producers
are at risk of bankruptcy if Opec goes
the other way and decides to fight
another battle for market share by
keeping the taps flowing.
“If I were in their position, I wouldn’t
be cutting more,” said Doug King,
London-based chairman of RCMA
Capital’s Merchant Commodity Fund.
“I’d sit it out and watch what happens.”
Analysts say US shale output is set to
grow comparatively modestly this year,
if at all, which would mark a big change.
Last year, output leapt by more than
1.2m barrels a day to a record high of
12.2m b/d, according to the Energy
Information Administration, a division
of the US Department of Energy.
But however significant all this has
been for America’s strategic and eco-
nomic interests, investors have not been
so enthused.
US producers absorbed $400bn of
capital between 2008 and 2018 without
returning much of it, said Artem
Abramov, head of shale research at Rys-
tad, a consultancy.
Wall Street has closed off the capital
pipeline, tired of funding a business
model that is better at pumping oil than
profits. If oil prices — down more than
20 per cent since the turn of the year —
stay subdued, casualties could emerge.
Or they will, unless Opec steps in again.
“The whole industry’s investment
case is predicated on Opec voluntarily
ceding market share,” said Matt Portillo,
a managing director at Tudor, Pickering
and Holt, a Houston-based investment
bank. He noted that a cut to support
prices would bolster US producers at a
point of maximum vulnerability.
“WTI at $50 a barrel does not work for
US shale,” he said, referring to the US
benchmark currently trading at just
over $48.
But the other option is also tricky for
Opec. The last time the cartel tried to
take on America’s shale patch, thingsended badly — a spectre of failure that
lingers in the room whenever Opec
advisers consider revisiting the idea.
The last Opec onslaught began with
the “Thanksgiving Massacre” of
November 2014, so named because the
Opec meeting fell on the day of the US
holiday. Saudi Arabia announcedan end
to market intervention, deliberately
allowing prices to drift lower to force
rivals out of business.
Two years of oil industry austerity
and producer nation fiscal pain ensued.
By the time Saudi Arabia threw in the
towel, US production had fallen by 1m
b/d from its peak, to about 8.5m b/d.
Shale producers emerged leaner and
fitter, capitalising on the oil price rally
that followed Saudi Arabia’s reversion to
the swing-producer role. Output rose in
the years after by almost 50 per cent.
“Without another cut this week, it will
be an even worse crisis for shale than in
2015-16,” said Christian Larochelle, an
independent Boston-based analyst,
especially given shale producers’ need
to keep spending and drilling just to
hold output steady.
Cutting back on drilling does not help
much because more wells are constantly
needed to offset fast-falling output from
existing wells. So less drilling just
“reduces future cash flows at a time
when the capital markets are increas-
ingly restrictive”, he added.Key to the resilience in 2015-16 was its
ability to cut costs. Producers moved
into the most prolific acreage, picked
the choicest wells, and honed efficien-
cies of scale and drilling techniques.
Wall Street also stood by the sector,
tiding it over untilprices recovered. But
these days, neither thecheap credit orn
the easy cost savings are available.
“What you don’t have now that
you did have last time is an industry
sub-optimally producing shale,” said Mr
Portillo. “The capital markets are closed
and productivity is plateauing.”
Moody’s, the rating agency, noted last
month that more than 60 per cent of the
$86bn worth of shale debt coming due
over the next four years is issued by
junk-rated companies, implying a
“higher degree of default risk for the
industry”.
A string of corporate collapses in the
shale patch would deepen investors’ dis-
trust — worsening the funding problem
— but it might not dent productiona lot.
Much current US output comes from
companies that went bankrupt last time
around but which restructured with
cheap capital under American Chapter
11 rules.
Opec would also have to stick with the
plan this time to keep producers in the
US beaten back. Even with WTI at $40 a
barrel, it will “take months to make a
difference to supply”, said Mr Abramov.Hopes rise that cartel will opt
for deeper production cuts to
support virus-hit industry
‘Without
another cutthis week, it
will be aneven worse
crisis forshale than
in 2015-16’US shale output
is only set to
grow modestly
this year as
funding has
been squeezed
by Wall Street
Andrew Burton/GettyCommodities. apital pipelineC
Cash-strapped US shale oil
prays for Opec bailout
R I C H A R D H E N D E R S O N —N E W YO R KRobinhood, the free stock trading app,
suffered a second outage yesterday,
hours after denying its 10m users the
opportunity to profit from one of the
best days for the US equity market since
the financial crisis.
The service disruption shortly after
10am in New York yesterday followed
the US Federal Reserve’s surprise deci-
sion to cut interest rates by half a per-
centage point to address the economic
impact of the coronavirus, triggering a
surge of activity on global markets.
The ompany said on itsc website: “We
are experiencing a system-wide outage.
We are working to resolve this issue as
soon as possible.”
The disruption came on the heels of
Monday’s problems, which began
minutes after the US market opened.
The platform remained out of action
all day, prompting some scathing com-
mentary from users who threatened to
defect to Robinhood’s rivals or sue the
company. One Twitter user created an
account calling for aclass-action lawsuit
and gained about 6,000 followers.
Shortly before noon yesterday, the
company said its service had been “fully
restored.”
The service interruption on Monday
left Robinhood users on the sidelines of
the best day for US stocks since Decem-ber 2018 and the third-best day since
the financial crisis.
The S&P 500 gained 4.6 per cent, par-
tially reversing the worst week for the
index since the crisis as worries that the
coronavirus would hit economic growth
swept through global markets.
Louis Avella, a 23-year-old construc-
tion worker from Brooklyn, had
recently signed up to Robinhood.
He had bought shares inVaxArt nda
iBioPharma, two penny stocks that had
surged in recent days. He tried to sell
shares in the companies on Monday but
the Robinhood app failed to execute the
trades. VaxArt then lost 18 per cent and
iBioPharma 10 per cent.
“When I went to sell, there was an all-
time high in some of my stocks and the
thing just crashed,” Mr Avella told the
FT. “It kept crashing and crashing. The
stocks fell, and I lost several thousands
[of dollars]. I don’t know what to do.”
Late on Monday evening, the com-
panyannounced hat it was back up andt
running but would test through the
night and that users might experience
“some downtime” yesterday.
“We experienced an issue with
a part of our infrastructure that resulted
in an outage,” it said. “We realise we let
our customers down, and we’re commit-
ted to improving their experience.”
It added that, contrary to some com-
mentary online, the glitch had not been
caused by a failure to code for the leap
year. Compensation would be available
to users “on a case-by-case basis”.Equities
Robinhood
shutdown
leaves users
feeling robbed
‘When I went to sell, there
was an all-time high in
some of my stocks andthe thing just crashed’
US shale on the rise as Opec
crude production falls
Million barrels a dayUS oil production
Opec oil production Sources: Wood Mackenzie; Energy Information
AdministrationProductivity gains in US
shale are starting to slow
Permian Basin (barrels a day) Rig
countProduction per rig MARCH 4 2020 Section:Markets Time: 3/3/2020- 17:37 User:stephen.smith Page Name:MARKETS1, Part,Page,Edition:EUR, 19, 1