From the Securities Lending Trading Desk

Bearish demand for biotechnology companies has increased after US politicians set their sights on the industry.  Volatility in the commodity sector is causing borrowers to seek shares of Singapore based trader, Noble Group. In Europe, traditional airlines are facing an assault from domestic budget firms and international upstarts on long distance routes, generating interest from short sellers. 

Below please find the October 6 edition of From the Trading Desk, which provides timely commentary about top security earners, revenue drivers and other factors influencing the securities lending market from the BBH Securities Lending Trading Team.

Americas

The prominence of mega-mergers is sparking speculation that the biggest deals are yet to come.  Strategists are suggesting that this year’s largest deals – Royal Dutch Shell’s offer to buy BG Group and Charter Communications’ bid for Time Warner Cable – could be just the beginning.  Both of those deals were both valued at roughly $79 billion.  Bloomberg has reported that the market is expecting more megadeals, citing decreasing revenue growth across the globe, inexpensive financing, and massive cash piles.  An increase in deals with a stock component would be good news for securities lending participants.

Bearish demand for biotechnology companies has increased after politicians set their sights on the industry.  Last week, reports that pharmaceutical prices have the potential to increase dramatically almost overnight prompted scrutiny from politicians.  The iShares Nasdaq Biotechnology ETF fell to a six-month low on September 29.  The securities lending desk continues to see extremely strong demand for many stocks in the biotech sector, including MannKind Corporation, Juno Therapeutics and Biocept.

Asia Pacific

Hong Kong property developers are slumping on speculation of a looming market correction.  The Hang Seng Properties Index dropped 15% in the third quarter and the Hong Kong Monetary Authority said in a report that the risk of a “downward adjustment” in home prices is increasing amid volatility in financial markets.  We continue to see securities lending demand for Goldin Properties Holdings and Evergrande Real Estate Group.

Volatility in the commodity sector has placed further downward pressure on Singapore based trader Noble Group.  The company’s share price has declined 65% this year and fell further last week following a global rout in commodity stocks led by Glencore.  There is an expectation that if commodity prices remain at their current lows, major restructuring will be required across the Asian commodity space.  Securities lending demand for Noble Group remains strong.

Europe

Traditional airlines are facing an assault from domestic budget firms and international upstarts on long distance routes, generating interest from short sellers.  Current short interest in European legacy airlines stands at 3.5% of shares outstanding, 60% higher than the start of the year.  Air France, SAS and Norwegian Air Shuttle have all seen a tightening in supply and spike in lending fees.  Meanwhile, short interest in discount airlines, such as Ryanair, has fallen by 40% since January.

The average short interest across the largest companies in Europe has increased in recent weeks.  Short interest has risen back to “grexit” levels as equity markets come under pressure after erasing year to date gains.  Average short interest has increased for 80% of STOXX 600 sector constituents while the index is down 14% from highs reached prior to the sell-off.  Carillion and FLSmidth have seen the largest increase in demand, while popular energy plays such as Seadrill, Saipem, TGS Nopec and SBM Offshore remain in focus.