Íø±¬³Ô¹Ï finance markets in H1 2023: what lessons can we draw?
As we move into the second half of 2023, Matthew Chessum, director of securities finance at S&P Global Market Intelligence, reviews three big themes from H1 2023 and how these have impacted the securities finance landscape
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Several big themes have dominated financial markets during the first half of 2023. Interest rate policy and the impact of the hiking cycle across both the banking and property sectors has captured numerous headlines. A thawing in relations between China and the US has been heavily reported, given the importance that this relationship has on supply chains and the sourcing of electrical components. The progress made in generative artificial intelligence (AI) has sent stock markets higher and the transition towards the broader use of electric vehicles has sharpened investor focus, given the sector’s level of competition, financing requirements and demand for raw materials.
As we move into the second half of 2023, we review three of the big themes from H1 2023 and look at how these have impacted the securities finance landscape. We also look forward to the second half of the year to see what themes may dominate in the future.
Interest rates and inflation
Over the first six months of 2023, interest rate policy has undoubtedly generated the most headlines across the financial press. Since January, central banks have continued to pursue their aggressive hiking cycles in a fight to reduce inflationary pressures. Over the past year, the European Central Bank has raised interest rates by 375bps and is expected to keep raising into June and July. The Bank of England has raised rates at the past 12 successive meetings and is expected to continue doing so going into H2, while the Federal Reserve has raised interest rates to a 16-year high.
These changes in interest rates have had a significant impact upon government bond activity within the securities finance markets. Over the past 18 months, short-dated government bonds have seen a substantial increase in demand as borrowers look to hedge interest rate moves. Borrowing fees have remained elevated and traded between 17bps and 19bps on average.
Given the increase in fees, revenues from government bonds exceeded those generated throughout 2022 during every month of the year to date. This is despite a decline in balances by an average 17 per cent for January to May. Corporate bond borrowing has also thrived in the current economic environment. The rapid increase in interest rates has led to falling prices and increasing yields. This has increased directional opportunities and provided a strong role for those borrowers looking to provide additional liquidity into the market as long-only investors continue to sit on the sidelines. Average fees have tracked within a range of 45bps to 47bps on average for January to May as a result.
Interest rates have also had a significant impact upon equity markets. A fall in stock markets took place towards the end of 2022 as investors believed a pause in interest rate hiking was imminent. As central banks have continued to increase rates, the S&P 500 has hit bull market territory — 20 per cent higher than its recent low — the DAX in Germany hit an all-time high and the Nikkei in Japan climbed to a 33-year peak. This increase in stock market values has led to a high degree of short covering and a subsequent decline in balances across multiple regions as a result. Íø±¬³Ô¹Ï lending (excluding financing) balances across all securities declined by more than US$107 billion during May alone (figure 1).
Fig 1: On loan balances ex-financing, all securities Jan - May ($T)The banking sector and credit risk
Following the rapid increase in interest rates over the past year, numerous financial institutions have come under pressure. In the US, Signature Bank (SBNY), Silicon Valley Bank (SVB) and First Republic bank (FRC) all collapsed during the first half of the year. The failure of First Republic Bank during May was the fourth regional US lender to collapse since early March and marked the second biggest bank failure in US history.
In Europe, the acquisition of Credit Suisse (CSGN) by UBS (UBSG) also took place through a government-backed deal, sending further shock waves throughout financial markets. Many of these banking stocks have traded special over the first six months of the year and short interest as a percentage of market capitalisation across the North American banking sector has remained close to multi-year highs of 0.54 per cent. Credit risk also took on a renewed focus from investors and a review of collateral procedures took place across all securities finance participants.
Technology and innovation
Technology has continued to be an important theme throughout the year. During the early months of 2023, the fallout from the collapse of cryptoexchange FTX was still being felt across financial markets. Within the securities finance market, companies such as Microstrategy Inc (MSTR) and Marathon Digital Holdings Inc (MARA) became popular borrows.
Microstrategy remains in demand and was the third-highest revenue generating stock across Americas equities during Q1. The electric vehicle sector has continued to attract investor speculation throughout the period. Electric vehicles have remained heavily shorted. Popular borrows based upon revenues generated between January and May include Lucid Group (LCID, generating US$111.3 million), Fisker Group (FSR, generating US$47.3 million), Xpeng ADR (XPEV, generating US$46 million), Nikola Corp (NKLA, generating US$42.5 million) Evgo Inc (EVGO, generating US$44.4 million), Tianneng Power International Ltd (HKG: 0819, generating US$8.2 million) and Quantumscape Corp (QS, generating US$48 million).
Across the APAC region, the semiconductor and software sectors remained heavily shorted. Geopolitical risk increased over the first half of the year following the spy balloon allegations, resulting in a change in industrial strategy concerning microchip and semiconductor production and distribution. Companies such as United Microelectronics Corp (2303) and Aspeed Technology Inc (5274) both came under pressure as a result.
Heading into H2
Íø±¬³Ô¹Ï finance markets have shown very strong revenues for the first half of the year, following on from the record Q1 revenues and the continued outperformance through to May. Despite this, H2 does appear to show some potential headwinds for the market. A recessionary environment is starting to take hold and stagflation is likely to become a key theme during H2. This may bring a possible decline in deployable capital and a lack of investor conviction.
A pause in the rate hiking cycle may start to negatively impact both fixed income revenues and balances. Further short covering may take place as the positive momentum continues to grow across equity markets and investment increases in defensive and value stocks. Finally, expect to hear a lot more about the AI revolution throughout the second semester. Is it a bubble or is the technology so transformative that current valuations will continue to rise? This is likely to be a key discussion throughout the coming months with the prevailing sentiment, no doubt, being expressed through the securities finance markets.
As we move into the second half of 2023, we review three of the big themes from H1 2023 and look at how these have impacted the securities finance landscape. We also look forward to the second half of the year to see what themes may dominate in the future.
Interest rates and inflation
Over the first six months of 2023, interest rate policy has undoubtedly generated the most headlines across the financial press. Since January, central banks have continued to pursue their aggressive hiking cycles in a fight to reduce inflationary pressures. Over the past year, the European Central Bank has raised interest rates by 375bps and is expected to keep raising into June and July. The Bank of England has raised rates at the past 12 successive meetings and is expected to continue doing so going into H2, while the Federal Reserve has raised interest rates to a 16-year high.
These changes in interest rates have had a significant impact upon government bond activity within the securities finance markets. Over the past 18 months, short-dated government bonds have seen a substantial increase in demand as borrowers look to hedge interest rate moves. Borrowing fees have remained elevated and traded between 17bps and 19bps on average.
Given the increase in fees, revenues from government bonds exceeded those generated throughout 2022 during every month of the year to date. This is despite a decline in balances by an average 17 per cent for January to May. Corporate bond borrowing has also thrived in the current economic environment. The rapid increase in interest rates has led to falling prices and increasing yields. This has increased directional opportunities and provided a strong role for those borrowers looking to provide additional liquidity into the market as long-only investors continue to sit on the sidelines. Average fees have tracked within a range of 45bps to 47bps on average for January to May as a result.
Interest rates have also had a significant impact upon equity markets. A fall in stock markets took place towards the end of 2022 as investors believed a pause in interest rate hiking was imminent. As central banks have continued to increase rates, the S&P 500 has hit bull market territory — 20 per cent higher than its recent low — the DAX in Germany hit an all-time high and the Nikkei in Japan climbed to a 33-year peak. This increase in stock market values has led to a high degree of short covering and a subsequent decline in balances across multiple regions as a result. Íø±¬³Ô¹Ï lending (excluding financing) balances across all securities declined by more than US$107 billion during May alone (figure 1).
Fig 1: On loan balances ex-financing, all securities Jan - May ($T)The banking sector and credit risk
Following the rapid increase in interest rates over the past year, numerous financial institutions have come under pressure. In the US, Signature Bank (SBNY), Silicon Valley Bank (SVB) and First Republic bank (FRC) all collapsed during the first half of the year. The failure of First Republic Bank during May was the fourth regional US lender to collapse since early March and marked the second biggest bank failure in US history.
In Europe, the acquisition of Credit Suisse (CSGN) by UBS (UBSG) also took place through a government-backed deal, sending further shock waves throughout financial markets. Many of these banking stocks have traded special over the first six months of the year and short interest as a percentage of market capitalisation across the North American banking sector has remained close to multi-year highs of 0.54 per cent. Credit risk also took on a renewed focus from investors and a review of collateral procedures took place across all securities finance participants.
Technology and innovation
Technology has continued to be an important theme throughout the year. During the early months of 2023, the fallout from the collapse of cryptoexchange FTX was still being felt across financial markets. Within the securities finance market, companies such as Microstrategy Inc (MSTR) and Marathon Digital Holdings Inc (MARA) became popular borrows.
Microstrategy remains in demand and was the third-highest revenue generating stock across Americas equities during Q1. The electric vehicle sector has continued to attract investor speculation throughout the period. Electric vehicles have remained heavily shorted. Popular borrows based upon revenues generated between January and May include Lucid Group (LCID, generating US$111.3 million), Fisker Group (FSR, generating US$47.3 million), Xpeng ADR (XPEV, generating US$46 million), Nikola Corp (NKLA, generating US$42.5 million) Evgo Inc (EVGO, generating US$44.4 million), Tianneng Power International Ltd (HKG: 0819, generating US$8.2 million) and Quantumscape Corp (QS, generating US$48 million).
Across the APAC region, the semiconductor and software sectors remained heavily shorted. Geopolitical risk increased over the first half of the year following the spy balloon allegations, resulting in a change in industrial strategy concerning microchip and semiconductor production and distribution. Companies such as United Microelectronics Corp (2303) and Aspeed Technology Inc (5274) both came under pressure as a result.
Heading into H2
Íø±¬³Ô¹Ï finance markets have shown very strong revenues for the first half of the year, following on from the record Q1 revenues and the continued outperformance through to May. Despite this, H2 does appear to show some potential headwinds for the market. A recessionary environment is starting to take hold and stagflation is likely to become a key theme during H2. This may bring a possible decline in deployable capital and a lack of investor conviction.
A pause in the rate hiking cycle may start to negatively impact both fixed income revenues and balances. Further short covering may take place as the positive momentum continues to grow across equity markets and investment increases in defensive and value stocks. Finally, expect to hear a lot more about the AI revolution throughout the second semester. Is it a bubble or is the technology so transformative that current valuations will continue to rise? This is likely to be a key discussion throughout the coming months with the prevailing sentiment, no doubt, being expressed through the securities finance markets.
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