Below please find the May 19 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.
Volatility is fueling short interest which we expect will drive demand throughout the summer. Short positions in futures tied to the CBOE Volatility Index have tripled since February, according to data released last week. Hedge funds and other money managers are coming around to a view that whatever the U.S. Federal Reserve’s schedule is for raising interest rates, it will not derail the bull market in the near term, according to analysts.
Fees have increased for SandRidge Energy amid bearish sentiment and limited streetwide availability. S&P reduced SandRidge’s corporate credit rating after the oil-and-gas explorer swapped shares for two classes of notes held by a single investor. Shares of SandRidge have fallen 81% in the past year amid a 42% drop in the price of oil.
Securities lending demand has increased for NetScout Systems after it announced plans to purchase Danaher’s Tektronix Communications and certain assets of Fluke Networks for $2.81bn. The acquisition would significantly increase Netscout’s scale and global presence as well as accelerate its entry into the cyber intelligence market, according to the company. Demand for Danaher is likely to increase as we near the deal’s critical dates in July.
Borrowers are seeking shares of Chinese brokerage stocks, citing risks of compression in trading commissions and potential enforcement of de-leveraging regulation. Share prices for Chinese brokerages are increasing as a result of the rapid expansion of margin financing in China and the early success of the Shanghai/Hong Kong Stock Connect. Some analysts, however, expect that tighter margin finance regulations and increased competition may negatively impact earnings. Demand has been strong for China Galaxy Securities and Haitong International Securities.
Demand for oil service providers has been strong. Operating conditions remain challenging for several firms in the sector, despite a strong recovery in Brent crude oil prices. Lower than expected new orders for oil rigs and high capital expenditure costs have negatively impacted prospects for oil service providers. We have witnessed strong securities lending demand for China’s Anton Oilfield Services and Singaporean firm Sembcorp Marine, both of which recently reported disappointing earnings data.
European car makers are in demand as macroeconomic challenges and government subsidies may curb demand for new vehicles. Government subsidies on new vehicle registrations in Italy and Spain are due to expire and, although oil prices have been subdued, European taxes remain high. Securities lending utilization has increased for Peugeot, Renault and Volkswagen.
Fees are increasing for stocks slated to be deleted from the MSCI Europe index at the end of May. Recalls for these names are starting to hit the market, which is squeezing supply and driving up fees. Banca Monte Dei Paschi, already a highly utilized security, is the most notable deletion from a lending standpoint. The company received European Central Bank approval for a $3bn capital increase, due to be launched by the end of the month. Other MSCI deletion names in demand include Assore, Celesio and Immofinanz.