The spread of uncertainty
17 March 2020
In these most uncertain of times, FIS’ David Lewis reviews how global markets and specifically short sellers have reacted in the first months of what could be a drawn-out period of market volatility
Image: Shutterstock
Certainty counts for a lot in many aspects of our personal as well as our professional lives. Most dimensions of the financial markets adore certainty; it makes for easy forecasting and predictable financial performances of everything from individual companies to entire economies. Recent weeks and months have seen little in the way of certainty; high volatility, even chaos might be better ways to describe the current market behaviours. Every news channel is bursting with the latest information on the coronavirus, market meltdowns, entire countries in lock down and, of course, the panic buying of toilet roll.
Add to this a collapse in oil prices as demand continues to fall and producers battle for market share. We may just be laughing a little less at those stockpiling their garden bunkers.
Short selling activity was somewhat muted at the outbreak of the virus, with most activity focussing on directly affected companies and industries. There was also talk of a possible interest rate cut in the US ‘later in the year’. Since then, the issue has escalated across the globe almost faster than the virus itself. We have witnessed major market drops, some falling faster and further than they did in the financial crisis that followed the Lehman Brothers default. Borrowing activity, used as a proxy for short interest covering has jumped as the contagion effect, (no pun intended,) of the virus became clear.
Cruise ship operators have certainly found themselves caught in a perfect storm, with clients stranded in quarantine on several ships around the globe, the situation has gone viral. Carnival PLC, the world’s largest leisure travel company, issued a profits warning over five months ago, as the share price dipped from around £42 a year ago to £32 in October 2019. Like the rest of the world, they would have been unable to foresee the impact the coronavirus would have on their business, owing in part to the older age demographic of their typical client representing the group most vulnerable to the virus itself. At the time of writing, the Carnival share price was floating around the £16.65 level, having dropped 48 percent over the last month.
Short interest has remained relatively muted, with the volume of Carnival shares being borrowed rising sharply over the past week, but from a very low level and way below levels seen earlier in the year. Looking at public disclosures from the UK Financial Conduct Authority (FCA) shows only one fund holding a reportable short position of 0.8 percent. However, as a sector, the hotels, restaurants and leisure companies, as defined by the Standard & Poor’s global industrial classification model, has seen short interest activity jump. Borrowing volume has risen by 170 percent over the last month and 38 percent over the last week. Volumes increased by 10 percent over the weekend commencing 6 March as the market entered what some have termed ‘Black Monday’.
Unsurprisingly, airlines have also come under much greater focus for the same reasons. Short interest volume has soared over the last month, rising up to 136 percent, over the last 30 days, one week and one day respectively. Major airlines have cancelled thousands of flights as bookings, both for leisure and business. Flybe, the regional UK airline, was the first airline casualty partially blaming its collapse on the spread of the novel virus. However, the airline had certainly been suffering from underlying financial health issues well before the virus struck.
Other airlines have suffered major impacts to their share prices. easyJet, one of the largest low-cost operators, had seen its share price hit a 12-month peak of £15.70 as recently as February, up 40 percent from the earlier low, close last week at £9.78, a fall of 38 percent. Short interest in easyJet shares climbed by 99 percent in the last 30 days, although it remains at just two-thirds of the levels seen in the middle of 2019. Ryanair Holdings of Ireland saw short interest in its shares climb much more slowly, adding 28 percent by volume over the last month. Again, levels remained well below previous peaks seen in the last year, with utilization not far into double figures.
Across the Atlantic, American Airlines had seen short interest rising steadily from July 2019 to a 24-month peak at the start of February. However, volume fell back sharply through February, before climbing around 20 percent over the last few days. Volumes still rising remain well below previous peaks. Finally, Delta Airlines exhibited much of the same pattern: growth of negative sentiment through the latter part of 2019, with a drop in February before a jump in recent days.
Uncertainty can often create panic, which, in turn, can lead to irrational decision making. Black Monday certainly saw significant values wiped from some of the world’s largest companies as panic selling gripped the markets. The muted response from short sellers would appear to suggest panic has not been present in every segment of the financial markets. Governments are just as susceptible to irrational acts as individuals are. Some might say that the much earlier predicted interest rate cut in the US and the half point cut in the UK, announced ahead of the latest budget statement might be the application of long-term economic tools to address short term issues.
We remain in the relatively early days of the global spread of the coronavirus. Some facts are known with regards to how it spreads and who might be most at risk, but there remains significant uncertainty, not to mention the economic impact it will have on the global economy. Only two directly affected industries have been looked at in this article, but there are very few industries that will escape the grip of the virus completely. While the real impact remains unknown, uncertainty will stalk the markets like a virus.
Add to this a collapse in oil prices as demand continues to fall and producers battle for market share. We may just be laughing a little less at those stockpiling their garden bunkers.
Short selling activity was somewhat muted at the outbreak of the virus, with most activity focussing on directly affected companies and industries. There was also talk of a possible interest rate cut in the US ‘later in the year’. Since then, the issue has escalated across the globe almost faster than the virus itself. We have witnessed major market drops, some falling faster and further than they did in the financial crisis that followed the Lehman Brothers default. Borrowing activity, used as a proxy for short interest covering has jumped as the contagion effect, (no pun intended,) of the virus became clear.
Cruise ship operators have certainly found themselves caught in a perfect storm, with clients stranded in quarantine on several ships around the globe, the situation has gone viral. Carnival PLC, the world’s largest leisure travel company, issued a profits warning over five months ago, as the share price dipped from around £42 a year ago to £32 in October 2019. Like the rest of the world, they would have been unable to foresee the impact the coronavirus would have on their business, owing in part to the older age demographic of their typical client representing the group most vulnerable to the virus itself. At the time of writing, the Carnival share price was floating around the £16.65 level, having dropped 48 percent over the last month.
Short interest has remained relatively muted, with the volume of Carnival shares being borrowed rising sharply over the past week, but from a very low level and way below levels seen earlier in the year. Looking at public disclosures from the UK Financial Conduct Authority (FCA) shows only one fund holding a reportable short position of 0.8 percent. However, as a sector, the hotels, restaurants and leisure companies, as defined by the Standard & Poor’s global industrial classification model, has seen short interest activity jump. Borrowing volume has risen by 170 percent over the last month and 38 percent over the last week. Volumes increased by 10 percent over the weekend commencing 6 March as the market entered what some have termed ‘Black Monday’.
Unsurprisingly, airlines have also come under much greater focus for the same reasons. Short interest volume has soared over the last month, rising up to 136 percent, over the last 30 days, one week and one day respectively. Major airlines have cancelled thousands of flights as bookings, both for leisure and business. Flybe, the regional UK airline, was the first airline casualty partially blaming its collapse on the spread of the novel virus. However, the airline had certainly been suffering from underlying financial health issues well before the virus struck.
Other airlines have suffered major impacts to their share prices. easyJet, one of the largest low-cost operators, had seen its share price hit a 12-month peak of £15.70 as recently as February, up 40 percent from the earlier low, close last week at £9.78, a fall of 38 percent. Short interest in easyJet shares climbed by 99 percent in the last 30 days, although it remains at just two-thirds of the levels seen in the middle of 2019. Ryanair Holdings of Ireland saw short interest in its shares climb much more slowly, adding 28 percent by volume over the last month. Again, levels remained well below previous peaks seen in the last year, with utilization not far into double figures.
Across the Atlantic, American Airlines had seen short interest rising steadily from July 2019 to a 24-month peak at the start of February. However, volume fell back sharply through February, before climbing around 20 percent over the last few days. Volumes still rising remain well below previous peaks. Finally, Delta Airlines exhibited much of the same pattern: growth of negative sentiment through the latter part of 2019, with a drop in February before a jump in recent days.
Uncertainty can often create panic, which, in turn, can lead to irrational decision making. Black Monday certainly saw significant values wiped from some of the world’s largest companies as panic selling gripped the markets. The muted response from short sellers would appear to suggest panic has not been present in every segment of the financial markets. Governments are just as susceptible to irrational acts as individuals are. Some might say that the much earlier predicted interest rate cut in the US and the half point cut in the UK, announced ahead of the latest budget statement might be the application of long-term economic tools to address short term issues.
We remain in the relatively early days of the global spread of the coronavirus. Some facts are known with regards to how it spreads and who might be most at risk, but there remains significant uncertainty, not to mention the economic impact it will have on the global economy. Only two directly affected industries have been looked at in this article, but there are very few industries that will escape the grip of the virus completely. While the real impact remains unknown, uncertainty will stalk the markets like a virus.
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