In the past week, we have witnessed unprecedented levels of market action as investors continued to process both the short- and long-term implications of the COVID-19 pandemic. Additionally, news of an oil price war between the world’s largest producers, Saudi Arabia and Russia, sent oil prices down as much as 31 percent, weighing on markets already concerned about the current demand environment. By the end of the week, markets showed some elements of recovery, with European markets witnessing some of the largest daily price increases since 2008, as policy responses geared up around the world. [As of March 16, 2020]
In South Korea, the Financial Services Commission (FSC) issued a six month short selling ban on Friday, similar to its ban during the 2008 financial crisis. While in Italy and Spain, respective regulators issued short sale bans in individual securities for a day, and ESMA reduced reporting thresholds for the disclosure of new net short positions. In the US, the Federal Reserve’s decision on Sunday to drop rates down to zero and add up to $700 billion in liquidity failed to calm investors’ nerves.
On the securities lending side, we have not yet observed an increase in broad-based demand that some may have expected. According to DataLend, global on loan balances were largely unchanged last week, despite the outsized volatility and downward momentum. With that in mind, we believe that much of the decline in stock markets could be attributed to long holders de-risking given that markets were close to all-time highs. At the same time, we expect the burgeoning virus narrative to have a longer-term impact on corporate earnings with specific sectors focus such as luxury goods, commodities, and travel related industries.
In Asia, we continue to see a significant impact on airlines. Hong Kong-based Cathay Pacific, one of Asia’s leading premium airlines, has been forced to reduce its capacity to and from mainland China by about 90 percent and slash overall traffic by nearly 50 percent. Australia’s Qantas Airways, Japan’s ANA, Japan Airlines, and a host of other regional airlines also have announced significant capacity reductions.
We have also seen increased demand in the Hong Kong listings of HSBC and Standard Chartered Bank on fears their bad debt provisions will grow as the recession deepens in Hong Kong. Similarly, China A share exchange-traded funds (ETFs) are also in strong demand as investors seek more broad short exposure to China’s domestic market.
In the Americas, as in Asia, monthly and weekly deltas illustrated a move away from single stock short bets into market ETFs and sector specific ETFs (such as finance, healthcare, technology, and real estate). This shift into ETFs has altered the make-up of lending demand. We have observed previously liquid securities in this space attracting stronger lending demand with fees also increasing. Canada’s TSX index has slumped 20 percent from its February 20 peak. Cannabis specials have particularly been hit hard with in-demand name Canopy Growth selling off 40 percent during the same time period.
In Europe, securities lending demand has broadly followed the same themes observed globally. Sharp increases in fees and demand have been observed for travel driven securities such as Air France, Deutsche Lufthansa, and TUI AG. We also witnessed a stronger short interest base in the luxury goods sector with companies such as Tod’s and Remy Cointreau heating up from a lending perspective.
In the European fixed income lending space, demand for borrowing debt increased with many of the industries affected by low oil prices and the spread of COVID-19. The automotive industry has seen several issues lose value over concerns about supply chain management with Gestamp Automoción bonds standing out after the manufacturer had its Wuhan plant shut down when the crisis began. Elsewhere, Swedish company Intrum AB saw a large increase in demand due to its exposure to the Italian mortgage market, where the government has offered relief of payments to its citizens. The firm’s €900 million issue due in 2024 has seen its securities lending utilization double in the past month, according to DataLend.
While the events of last week began as a challenging period for China and South Korea, it is now clear that it has escalated into a broader global crisis. With markets reacting rapidly to fast moving news developments, it is apparent that the situation is highly dynamic. The trends we observe today may no longer exist next week as government and corporate responses to COVID-19 become stronger and more defined. In any case, as we near the end of the first quarter, one thing is certain: 2020 looks set to be very different from how many expected it to be when it began.
All data sources are Bloomberg, March 2020, unless otherwise noted.