From the Securities Lending Trading Desk

Shopping Trolley

Demand for French supermarket operator Casino Guichard has increased following a negative analyst report.  Meanwhile, the Fed’s rate increase was the headline in the US and borrowers are seeking shares of Chinese polysilicon and solar panel manufacturer GCL Poly Energy Holdings.

Below please find the December 22 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.

Our next edition will be published on January 12.

Americas

Last week the Federal Reserve finally raised interest rates from a range of 0-0.25% to a range of 0.25-0.50% — the first increase to rates in nearly a decade.  The Fed indicated this will be one of many moves as they “gradually” move rates, with most officials expecting the Fed Funds rate to be roughly 1.375% by the end of 2016.  Though the move was largely viewed in a positive light, some investors remain concerned by economic global weakness, oil prices that seem to have no floor and uncertainty in the junk bond market.

Weak demand from China has pushed metals’ prices lower, while demand for Vale SA has moved higher.  Vale, the world’s largest iron ore miner, saw its share price fall to a 52-week low last week as iron ore prices plummet near 10-year lows.  A supply glut, combined with weak demand from China, are pushing the value of steel-making material producers even lower.  The declines are putting Vale’s ability to pay a dividend and generate returns into question.  Further complicating the situation for Vale is the fact that, geographically, the Brazilian company is further away from China than their competitors in Australia.  Finally, Brazil is in the midst of a recession and Standard & Poor’s recently cut Brazil to junk.

Asia Pacific

Shares in polysilicon and solar panel manufacturer GCL Poly Energy Holdings fell sharply last week following the announcement of a discounted rights offering.  The rights issue is designed to boost the debt laden Chinese manufacturer’s balance sheet following a collapse in the price of polysilicon. Global polysilicon prices, which peaked above $475/kilogram in 2008, have fallen 29% this year alone and are now about $14.20/kilogram. We have seen strong historical lending interest in the solar sector correlated with declining polysilicon prices and market oversupply.

Troubles continue to mount for Prada S.p.A after the company reported third quarter results that missed estimates as sales in Hong Kong and Macau continue to decline.  The luxury-goods maker has been grappling with a weak market for luxury items amidst a continued crackdown on conspicuous spending in Mainland China and a loss of market share to more affordable rivals.  We continue to witness strong securities lending demand for shares in the company, which have declined by over 40% this year.

Europe

UK shorts are increasing in popularity across Europe.  European short interest has been relatively subdued across the Eurozone in 2015 as the European Central Bank’s QE program has aided in propping equity markets.  As the UK falls outside the scope of the ECB’s QE, the UK market has seen increased shorting in names such as Lonmin, Carillion, AO World, Gulf Keystone Petroleum, Talk Talk Telecom and KAZ Minerals.  These names are trading at deep rebates and heightened utilization.

Casino Guichard shares are under pressure following a negative analyst report.  Demand for French supermarket operator Casino Guichard increased after Carson Block announced the firm is using “financial engineering” and the company’s debt burden is alarmingly high. Block echoed a similar sentiment for Casino Guichard’s largest shareholder, Rallye SA, which has become increasingly hard to borrow.  Both stocks trade at medium range fee levels, with Rallye being the less liquid of the two names.