Friday 20 November 2020 ★ FINANCIAL TIMES 9

COMPANIES & MARKETS

Commodities. Pandemic outlook Cross asset

Lack of clarity
Vaccine hopes raise prospect on Brexit
equivalence
of sustained slide for gold stirs alarm
Philip Stafford — London
Jim Brunsden — Brussels

Traders are ramping up warnings of dis-

ruption in financial markets from Janu-
ary without clear decisions on how the
UK and EU will co-operate after the
Brexit transition period ends.
Some derivatives trading may need to
shift to the US unless the two sides can
come to an agreement over so-called
equivalence that would allow mutual
recognition of regulatory standards,
industry bodies say.
Decisions were due at the end of June,
but the EU has withheld guidance with-
out more clarity from the UK on how far
it intends to diverge from EU rules. With
just six weeks remaining before the cut-
off point, anxiety is rising.
“There are still some glaring gaps that
haven’t been addressed by either the UK
or EU, including equivalence for trading
venues,” said Scott O’Malia, chief execu-
tive of Isda, an industry association for
the derivatives market.
Without equivalence, British and EU
companies may have to trade some
derivatives in the US, he added. “This
will lead to fragmentation and a lack of
efficiency for no apparent benefit . . .
We need certainty as soon as possible.”
The EU and UK have agreed that the
future relationship for financial services
should be settled through each side

Bulls are looking brokerage StoneX, said demand from

Successful Covid drug trials
burnish bets on assets tied to
global economic recovery
Henry Sanderson — london
Rising prospects of a Covid-19 vaccine
are threatening to kill off the bull mar-
ket for gold, after an epic two-year rally
that pushed the precious metal to a
record high in the summer.
Gold prices have already fallen about
10 per cent since their August peak
above $2,000 a troy ounce, as confi-
dence gradually returned to asset mar-
kets. This could be the start of a sus-
tained slide for the metal, after success-
ful results in two trials for Covid-19 vac-
cines emerged this month.
Some bulls have not given up, point-
ing to a possible rise in inflation that typ-
ically boosts the precious metal. But a
recovering global economy dents the
appeal of gold, commonly used as a
haven in times of turmoil. And as inves-
tors also move out of government bonds
for riskier assets, pushing yields higher,
the relative attractiveness of gold —
which offers no income — will be dulled.
Analysts at Macquarie say the “cycli-
cal bull market” for gold has already
come to an end: they compare today to
2013, when a decade-long rally found-
ered as the “crisis of the day subsided
and expectations for further policy eas-
ing diminished”.
The bank expects gold prices to fall to
$1,550 a troy ounce next year — a drop of
about 17 per cent from current levels.
Marcus Garvey, Macquarie’s head of
metals and bulk commodity strategy,
said the winter will see a “tug of
war” between the short-term Covid-19
Gold eclipsed its 2011 peak in a strong rally this year
$ per troy ounce
2005 10
Source: Refinitiv
challenge and the longer-term outlook.
“We’re reasonably constructive on the
global growth outlook for next year, so
we think gold has passed its peak,” he
added.
The recent sell-off has been stoked by
outflows from gold-backed exchange
traded funds, which were a key factor in
the surge in the first half of the year.
Since peaking in mid-October, these
funds’ physical holdings have fallen by
1.9m ounces to 109m, according to
Bloomberg data. Holdings in the largest
such ETF, SPDR Gold Shares, hit their
lowest level since July this week.
Susan Bates, an analyst at Morgan
Stanley, says the bank sees “bear fac-
tors” coming together for gold, such as a
recovering global economy, aided by the
eventual rollout of a Covid-19 vaccine,
and a rise in bond yields.
Some investors are moving into other
precious metals more tied to industrial
demand and therefore likely to benefit
from the post-pandemic recovery.
As gold tumbles, silver, which is used
in solar panels, is on track for a second
consecutive monthly gain. Prices for
2,500
2,000
1,500
1,000
500
0
15 20
platinum, a metal used in catalytic con-
verters, rose to their highest since mid-
September this week.
“The vaccinations will reduce risk
therefore gold is less desirable as a risk
hedge,” said Trevor Raymond, director
of research at the World Platinum
Investment Council, an industry body.
The market may not be able to rely on
central banks to pick up the slack. In
August, these institutions turned net
sellers of gold for the first time in a year
and a half, according to the World Gold
Council.
Instead, offsetting that fall in invest-
ment demand may require India and
China, the world’s largest consumers, to
step up. Buyers in both countries have
been largely absent from gold’s rally this
year, with global jewellery demand fall-
ing by 29 per cent in the third quarter,
according to the WGC.
But the average premium for gold
prices in India and China over interna-
tional prices has recovered to near pre-
pandemic levels, according to Goldman
Sachs.
Rhona O’Connell, an analyst at
to central banks the two countries could pick up just as
and private ETF selling accelerates. The same pat-
buyers for gold tern occurred when gold prices slumped
price cheer — David seven years ago.
Gray/Bloomberg
“As risk perception changes, private
consumers will come back into the gold
market while money managers are
likely to be bailing out,” she said.
Gold, a common inflation hedge,
could also rebound if price rises pick up
steam and central banks delay interest
rate rises: a fall in inflation-adjusted or
“real” interest rates has been a key
driver in this year’s rally.
Goldman Sachs says the risk of infla-
tion is “greater than at any other time
since the 1970s”, due to pledged green
spending plans in China, Europe and in
the US by Joe Biden, the president-elect.
The bank, which expects the Federal
Reserve to keep rates on hold until
2025, predicts gold will reach $2,300 an
ounce in the coming months.
Citi, meanwhile, predicts gold prices
will set fresh highs in 2021, as central
bank buying keeps yields on other
assets suppressed.
“Gold markets will probably be pulled
higher as reflation concerns grow with
the recovery and investors look to buy
the currency of last resort,” said Jeff Cur-
rie, head of commodities research at
Offsetting Goldman Sachs.
But others think any speed-up in
a fall in price rises will be outweighed by the
investment effect of the wider economic rebound.
Macquarie’s Mr Garvey said it was an
demand “oversimplification” to say gold trades
may require with inflation. “It trades on the inter-
play between inflation and interest
India and rates,” he added. “We’re not saying you
China to don’t get a rise in inflation expectations
— but we think you get a larger rise in
step up nominal yields.”
‘There are still some
glaring gaps that haven’t
been addressed by
either the UK or EU’
assessing whether the other qualifies for
access rights. That requires individual
decisions on nearly 40 market activi-
ties, including audit standards, capital
requirements and access to exchanges
and clearing houses. The discussion is
separate from the ongoing trade talks.
The UK this month announced it
would press ahead with some equiva-
lence determinations, allowing UK-
based banks to use EU financial bench-
marks, clearing houses and credit-
rating agencies, and exempting them
from a jump in capital necessary to
absorb losses linked to EU exposures.
Brussels, however, has not reciprocated.
EU diplomats say the union’s stance
reflects a mixture of negotiating tactics
connected to talks on the two sides’
future relationship, a political agenda to
become more independent from the
City in future, and concerns about hand-
ing rights to a country seeking to break
away from EU rules.
A lack of equivalence decisions would
not shut UK banks, investors and trad-
ing venues out of the EU market, but it
would open gaps in regulation as both
sides hammer out agreements on a
country-by-country basis.
“The uncertainty is not doing anyone
Our global any good,” said Mark Spanbroek, chair-
team gives you man of FIA Epta, an industry group rep-
market-moving resenting about 30 of Europe’s proprie-
news and views, tary traders. “If you don’t solve this you
24 hours a day are running into bilateral agreements,
ft.com/markets where some [national] regulators inter-
pret the rules differently to others”

Asset management Fixed income

Norway’s oil fund to use more external
managers in first sign of ‘tuned’ approach
Richard Milne — Oslo
Norway’s $1.2tn oil fund will signifi-
cantly increase its use of external asset
managers next year as the world’s big-
gest sovereign wealth fund seeks to
boost its returns.
Jon Nicolaisen, deputy governor of Nor-
way’s central bank with responsibility
for the oil fund, said yesterday that from
next year, the fund would be able to
invest 5 per cent of all its assets with
external managers, up from the current
limit of 5 per cent of its equity portfolio.
That would mean an increase of about
43 per cent, or $18bn, in the money the
fund could place with external manag-
ers, according to calculations by the
Financial Times.
Norway’s oil fund had about $43bn
placed with external managers such as
Templeton, Old Mutual and Schroders
at the end of 2019 — 3.9 per cent of the
fund’s capital — with a focus on emerg-
ing markets or small-cap stocks.
External managers have delivered
excess returns of NKr48bn ($5.3bn) to
the fund during the past two decades,
with three-quarters of that coming in
the past eight years, according to the
fund. Norway’s oil fund has been
through a tumultuous year after its
appointment of former hedge fund
manager Nicolai Tangen as its new chief
executive led to extraordinary political
wrangling and media scrutiny of his
investments which almost derailed his
taking over.
Mr Tangen finally took over in Sep-
tember after agreeing to transfer his
entire shareholding in $19bn London-
based hedge fund AKO Capital to a
charitable foundation set up to resolve
Jon Nicolaisen: deputy head of the
central bank responsible for oil fund
concerns over potential conflicts of
interest.
The new oil fund boss has told the FT
he wants to “fine-tune” its management
to deliver excess returns. In his first
interview in October, Mr Tangen said it
should “use risk in a more clever way”
by, for instance, excluding more compa-
nies from its portfolio on environmen-
tal, social and governance issues.
Mr Nicolaisen presented the increase
in use of external managers alongside
risk-based divestments as examples of
how the fund could boost its returns.
The fund gave 74 fund managers 83
different mandates last year with 66 in
emerging markets equities and 17 in
small-cap stocks in developed coun-
tries. The external managers include
some hedge funds, such as Algebris, as
well as emerging market specialists
such as Ashmore.
“These investments spread the fund’s
risk across more markets. External
asset managers also help the fund to
steer clear of problematic business
models and companies and sectors with
weak ownership structures. It would
have been difficult to achieve without
local knowledge,” said Mr Nicolaisen.
China draws bumper demand for first
negative-yielding sovereign bond issue
Hudson Lockett and Thomas Hale
Hong Kong
China has sold its first negative-yield-
ing sovereign bond, a euro-denomi-
nated deal that drew bumper demand
from European debt investors facing
record low returns across the region.
The offering, which drew about €18bn
worth of orders for €4bn of bonds, is the
latest sign that investors are rushing to
gain exposure to China as it recovers
from the pandemic more quickly than
Europe or the US.
The bond sale by China’s finance min-
istry gave large institutional investors
the opportunity to grab higher yields
than those available in Europe, where
central bank easing to cushion the eco-
nomic blow of the pandemic has pushed
interest rates to record lows.
The yield on the five-year, €750m
bond was priced 0.3 percentage points
above the benchmark mid-swap rate of
minus 0.45 per cent, offering investors
an effective interest rate of minus 0.15
per cent, according to a term sheet seen
by the Financial Times.
The rest of the euro-denominated
debt offering was composed of a 10-year
€2bn bond and a 15-year €1.25bn bond,
carrying yields of 0.318 per cent and
0.665 per cent, respectively.
By comparison, the yield on five-year
German Bunds, which are typically seen
as a safe haven, hovered around minus
0.74 per cent yesterday.
“This was a combination of the rarity
of issuance alongside a positive outlook
for China’s economy,” said Alan Roch,
‘When you [as China] issue
€4bn . . . you’re far from
having filled people’s shoes
in terms of demand’
head of bond syndicate in Asia at Stand-
ard Chartered, one of the banks on the
deal.
He added that “From a relative stand-
point, when you [as China] issue
€4bn . . . you’re far from having filled
people’s shoes in terms of demand.”
Sam Fischer, head of China onshore
debt capital markets at Deutsche Bank,
another bank on the deal, said the
strong demand “shows investors are still
underexposed to China and there defi-
nitely is a scarcity value perceived in
these bonds”.
About 72 per cent of investors were
from Europe, the Middle East and
Africa.
Bankers said the five and 10-year
offerings were largely snapped up by
central banks and sovereign investment
funds, while the 15-year tranche skewed
towards European asset managers,
insurers and pension funds.
China’s finance ministry had
expressed concerns over issuing a
negative-yielding bond last year when it
issued its first euro-denominated
bonds, according to bankers on the deal,
but it has since become more comforta-
ble with the concept.
“We did some education in the mean-
time,” said one banker who worked on
both deals. “Issuing at a negative yield
doesn’t mean you actually have to have
a back-office team that chases investors
[for payments], it just means they’re
going to pay you up front for the nega-
tive portion.”
The latest sovereign issuance from
China comes weeks after Beijing sold
$6bn in dollar debt directly to US buyers
for the first time.