From the Securities Lending Trading Desk

Pharma M&A is driving activity in Europe.  Elsewhere, the lending desk is seeing demand for FitBit and Noble Group.

Below please find the August 11 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

Falling oil prices continue to drive demand.  Oil prices, which have tumbled more than 50% since last summer, continued to fall last week.  Crude-oil futures dropped to roughly $46 a barrel.  Many of the names in this sector are now trading at 52-week lows, including Chesapeake Energy, Ultra Petroleum, and Transocean.  Borrower demand is high and liquidity is limited.

Brokers are questioning whether Fitbit, manufacturer of wearable fitness trackers, is overweight from a share price perspective.  There has been strong directional demand for Fitbit as the share price rallied as much as 150% since going public at $20 per share on June 17.  However, the share price is trending lower since the company posted narrower margins in its first earnings report following the initial public offering.

Asia Pacific

Chinese equity markets continued to decline last week, despite witnessing unprecedented levels of government intervention.  In addition to spending an estimated $145 billion in the past two months to stabilize both the Shanghai and Shenzhen indices, the government has imposed a variety of other measures in an effort to reduce market volatility.  As a result, we have seen increased securities lending demand for domestic brokerages such as Citic Securities, GF Securities and Guotai Junan Securities on concerns these measures may dent future earnings.

Securities lending demand for Singapore-listed commodities trader Noble Group has increased significantly.  Noble’s stock has lost more than half its value since mid-February, when a group calling itself Iceberg Research published criticism of the company’s accounting.  Noble has rejected the assessment and released an analysis of its practices by PricewaterhouseCoopers.  We have seen a sharp increase in lending demand in recent weeks.

Europe

The world’s biggest oil companies are painting a grim picture of the future and speculators are listening.  Hedge funds reduced bullish bets to the lowest level in five years as oil capped its worst month since the financial crisis.  BP expects oil prices to be lower for some time and Royal Dutch Shell confirmed its preparing for a prolonged downturn. Further, according to Bank of America, supply will outpace demand by 1 million barrels a day.  The securities lending desk continues to see strong utilization within the oil service sector.  Fees are rising for drillers Transocean and Saipem and utilization has been steady for the leading seismology companies including CGG, TGS Nopec and Petroleum Geo-services.

The global pursuit of deals by drug makers took a turn last Tuesday.  Shire, which last year had sought to sell itself to AbbVie, disclosed that its $30 billion all-stock offer for the biopharmaceutical company Baxalta had been rebuffed last month.  This was seen as a move to put pressure on Baxalta shareholders to encourage the company to negotiate.  A merger would create a giant in the treatment of rare diseases.  On the securities lending desk, we have seen a minimal increase in utilization for Shire, but continue to watch developments.