From the Securities Lending Trading Desk

From the Securities Lending Trading Desk

We discuss the impact of last week’s historic market swings on US securities lending activity.  In Asia, demand is increasing for Chinese property developers following China’s devaluation of the yuan.  M&A continues to drive activity across multiple sectors in Europe. 

Americas

Last week’s historic market swings had little impact on US securities lending activity.  The US market seesawed as investors sharply sold off equities early last week amid multiple market concerns including devaluations in the Chinese market, falling oil prices, struggling market data and uncertainty around the timing of a potential rate increase in the US.  Analysts questioned whether algorithmic trading systems were to blame for the huge movements or whether this was a market correction that was a long time coming.  Despite high market volatility, securities lending demand was little changed.  Most borrows for short positions remained open, there was no significant increase in demand for new trades, and large client sell-offs never materialized.

The securities lending desk has been actively re-rating open loans of MannKind Corporation, a biopharmaceutical company.  MannKind’s share price fell to a 52-week low of $3.31 last week.  As we have noted in previous communications, the biotech sector is extremely sensitive to company-specific news.  MannKind has been the subject of bearish reports concerning Afrezza, the firm’s insulin inhaler.  Broker demand remains strong as long-term interest persists.

Asia Pacific

Last week’s volatility in the Asian equity markets spurred an increase in securities lending demand across a broad range of sectors.  The coal, iron ore and oil sectors have been in particular focus on concerns the Chinese economy is slowing down faster than anticipated.  Consequently, we continue to witness robust securities lending demand for Anton Oilfield Services, China Coal Energy and Fortescue Metals Group.

Demand is increasing for Chinese property developers following China’s devaluation of the yuan.  Developers in China refrained from using forex derivatives to mitigate currency losses due to confidence in a stable yuan and now face losses on their offshore borrowing.  Historically, we have seen a rise in lending demand for property stocks following negative Chinese economic data with a focus on Evergrande Real Estate Group and China Vanke Co., Ltd.

Europe

A collapse in crude oil prices has triggered consolidation across the industry. Maurel et Prom, the mid-size oil and gas company, is voting to absorb MPI in an all-stock deal. The market may see more M&A in the oil and gas sectors as the oil industry reels from a drop in crude oil prices and slowdowns in exploration. Three of the last five quarters have exceeded $160 billion in deal volume according to data compiled by Bloomberg. “Everyone is talking with everyone…The industry’s push for consolidation stems from the need to share production costs and development of reserves,” Maurel CEO Jean-Francois Henin said Friday.

European M&A has been a key driver of securities lending demand, despite market volatility. The desk is seeing demand as a result of a number of deals. Terex, a US crane and construction machinery maker, agreed to combine with Finnish competitor Konecranes Oyj in an all-stock merger. Out of France, Ingenico, a French payments processing company, bid for Worldpay. Finally, Just Retirement Group will buy Partnership Assurance Group in transaction valued at £668.5 million.