Markets and Securities Services

January 2016 | Issue 111

Welcome

Gareth Mitchell Global Head of Trading for Agency Securities Lending

As David Martocci highlighted in the December edition (110) of Market Monitor, 2015 was a remarkable year for Citi’s Agency Securities Lending business, one in which we continued to deliver excellent results for our clients while expanding our lendable asset base. Things do not happen in isolation. We have for many years heavily invested in our technology capabilities, in the global footprint of markets we lend in on your behalf, and in the expertise of our people.

For our industry, our clients and the borrower community, 2016 looks like it will be a transformational year. There are substantial headwinds to flow activity, which, at the time of writing, are stronger than in previous years. This, in turn, has an impact on the “traditional” revenue streams accessed by lenders and clients. An ever-changing regulatory landscape continues to shape how trades are structured for agent lender and borrower alike ─ with whom, what collateral choice, which tenor, what , to clear or not, etc. Citi runs a tailored lending program, individually tailored to each of our client’s requirements and risk profile. In a market where there are no “one-size-fits-all” trade structures, bespoke is a differentiator.

The fact is, innovation is the cornerstone of what we do. It is only by continually reevaluating the market, adapting and innovating that we at Citi can deliver consistent results for our clients, as well as bringing different revenue streams to market. In TAO (Trading, Analytics and Optimization), we have a market-leading platform to complement our global trading talent. TAO is agile technology. It has constant global trading desk feedback combined with a rapid speed of deployment allowing Citi to extract greater value for clients. In late 2015, we launched our pay-to-hold capabilities and are now looking to further adapt this for HQLA (high-quality liquid assets) trades. This innovation offers brokers on- demand liquidity, while attracting a premium for clients who can offer it as part of their fixed-income lending programs.

Around the globe, we also continue to pioneer lending in new markets, with India slated for this year and a number of markets in emerging Asia and Latin America being actively investigated. New markets bring the opportunity to deliver additional revenues to our clients, differentiate Citi against our peers and allow us to be the go-to agent lender of choice for borrowers. Within the cash reinvestment space, our DAIS (Directed Agent Investment Service) product goes from strength to strength, being able to offer Citi’s corporate clients, buy-side clients and central clearing counterparties access to a range of investment and liquidity transformation opportunities.

“What, then, is the true Gospel of consistency? Change. Who is the really consistent man? The man who changes” (Mark Twain).

Citi has shown throughout its history the ability to be flexible and adaptable in times of change. Hence, it is with confidence that we look forward to 2016 and continue to deliver for our clients while investing in our infrastructure for the future. January 2016 | Market Monitor 2

US equities

As December came to an end, all the the fact that approximately half of US Active for the month included: major equity benchmarks ended 2015 households use natural gas to heat with a loss, with the exception of the their homes.4 • LINE (Linn Energy LLC) Composite, which finished up • TDW (Tidewater Inc.) 5.73% for the year.1 Additionally, the tumult in oil prices this year has pulled down the value of oil • ZOES (Zoes Kitchen Inc.) Meanwhile, the Dow Jones Industrial company shares and the performance • CHK (Chesapeake Energy Corp) Average finished down 2.23%, the of the overall market.5 • PLUG (Plug Power Inc) S&P 500 down 0.73%, and the Russell 2000 down 5.48% for the year.2 One positive from all of this is that all • RIG (Transocean Inc) this pain for energy companies is good • CLF (Cliffs Natural Resources) Seven of the ten biggest losers in the for consumers, who are now enjoying S&P 500 were energy companies this low prices for gasoline and shrinking • FIT (FitBit Inc) year, particularly those dependent heating bills.6 The -awaited rise • UNIS (Unilife Corp) on the price of natural gas one of the in the Fed’s interest rate finally came • CNX (Consol Energy Inc) biggest stories of 2015.3 and then went during the month of December, as the market seemed to • MNKD (Mannkind Corp) Mother Nature has contributed to take the move in stride with relative these losses as an extraordinarily ease. A big question is how many warm fall has led to the US slashing interest-rate hikes we can expect see demand for heating. This is in spite of in the next 12 months. Stay tuned.

US corporate bonds

There is not a lot to note here as the Of note, although not surprising, New Issues for December included: corporate bond market was a quiet there was not a single issuance of one in December, with a limited story investment-grade corporate bonds • Bank of Nova Scotia Inc to tell. for the final three weeks of the month (064159HB5) from 18 through to 31 December, as the • Chesapeake Energy Corp A grand total of USD57.1 billion of market awaited the interest-rate hike (165167CQ8) investment-grade corporate bonds by the Fed and the upcoming holidays.8 were issued in the during December, which is a fall of We’ll keep an eye on the coming 46.9% from the previous month and months to see what direction the the number of new issuers fell from corporate bond market heads. 93 in November to 55 in December.7

1 See https://www3.troweprice.com/usis/content/iinvestor/en/planning-and-research/t-rowe-price-insights/markets/weekly-market-wrap-ups.html, last accessed on 5 January 2016. 2 See www.troweprice.com. 3 See http://www.nbcnews.com/storyline/2015-year-in-review/after-wild-ride-stock-markets-end-year-almost-where-they-n488696, last accessed on 5 January 2016. 4 See www.nbcnews.com. 5 See www.nbcnews.com. 6 See www.nbcnews.com. 7 See http://marketrealist.com/2016/01/no-investment-grade-corporate-bond-issuance-3-weeks-december/, last accessed on 5 January 2016. 8 See www.marketrealist.com. January 2016 | Market Monitor 3

US cash and money markets1

The highly anticipated and televised The Federal Reserve has illustrated was an indication of the high levels Federal Open Market Committee a propensity to act as a backstop to of cash in the market and the limited (FOMC) hike of the Fed Funds target overnight dealer supply over quarter- number of investment alternatives. range of between 0.25 and 0.50 bps ends and dramatically increased the was in line with street expectations. size of the RRP (Reverse Repurchase As money market fund reform Program) program in conjunction continues to pressure the end The accompanying dovish tone of the with the rate hike. The program was of the curve, perhaps the Fed can FOMC statement allayed any fears increased to 2 trillion, which appears provide some relief as its provides of a rapid movement in rates and to have alleviated market pressure, as a higher-yielding investment emphasized a gradual pace with an dealers contracted balance sheets on alternative through the RRP. intense focus on economic data to year-end. However, with an approximate USD26 dictate the trajectory of monetary billion reduction in bills for the first policy going forward. For 12/31, the Fed’s ON RRP had a two weeks of the New Year, the record USD475 billion in usage, which increases may be limited.

US Treasury and agency2

There were a lot of moving parts in the trading near GC levels. But very soon, went from an average of of between 1 fixed income lending world in December. especially for a 2-year, the issue began and 2 bps in November to as wide as 10 to run, trading in negative territory bps in December, settling mostly in the First, it was a terrific month for specials. before the end of the first week, 5 or 6 bps range. double-digit negatives for the second, Second, in the spread between triple-digit negatives for the third, and The Fed move on 16 December forced deliverable GC (general collateral) and through the fail charge for the forth. levels higher. Pre-Fed, the Opening GCF (general collateral financing), GC Funds rate was in the low teens. Post- had unexpectedly widened. There were several off-the-run issues Fed, Funds were opening in the mid in demand throughout the month, 0.30s, except for year-end, which, Third, there was a Fed tightening. especially towards month- and year- oddly, stood at 0.12%. Pre-Fed, UST And fourth, market participants end, which is not unusual since some GC averaged in the mid-teens and were preparing for the year-end accounts are obligated by regulation to Post-Fed it has been in the mid 0.40s, statement day. have their collateral back in the box for except for year-end, which stood in year-end. When this happens, supply for the mid 0.50s. It’s strange to see the The depth and breadth of specials random specific issues decrease, thus new rate paradigm, especially since had been quite robust throughout creating scarcity value for a potentially funds have been near-zero since 2008. the month. The 10-year note, 2.25 wide array of treasuries and agencies. However, with just a 25 bps tightening, 1/15/25 912828M56, which was newly the Fed Funds range of between 25 and issued back in mid-November, traded There was an interesting development 50 bps is still near-zero. progressively deeper as a special for the to the spread between DVP (deliver first two weeks of December. The issue verses payment) GC and GCF GC for Market participants spent the better traded deep in double-digit negative treasuries. The primary difference part of December preparing for the territory for the first week of the between the two is the taker of GC year-end statement day, which turned month and with triple-digit negatives under the DVP methodology will have out to be quite pedestrian. Of course, for the second. Moreover, there were access to the securities delivered to GC was elevated, but not as much as the several trading sessions when, after the them and they can then rehypothecate market originally expected. The bigger morning average had been established, the collateral. This gives the buying problem was the aforementioned 0.12% the issue traded all the way down to, dealer of GC the option of, if their needs opening for Fed Funds. It was a big hit and in some cases through, the TMPG change later in the day, utilizing the to the yield on assets that float off of (Treasury Market Practices Group) fail collateral they received to either raise that index. The morning was incredibly charge of 300 bps. money later in the day or perhaps cover hectic with several off-the-runs trading a firm short. The GCF methodology special, nearly the entire bill curve The 2-year, 0.875 11/30/17 simply has the dealer waiting for cash trading special, the old 2s trading near- 912828M72, also traded at the end of the day (4:30 EST). The fail and the 10s pretty deeply in double- extraordinarily well, settling as spread between the two methods of GC digit negatives. usual at November’s month-end and

1 Federal Reserve. 2 Bloomberg. January 2016 | Market Monitor 4

Asia-Pacific equities1

Taiwan Kong trading before its shares were Cardno (CDD AU) and Tiger Resources Further news surrounding ASE’s suspended. Both stocks were part (TGS AU) both announced entitlement (2311 TT) announcement that it will of the FTSE rebalance announced offers this month. commence with a tender offer to in December – being deleted from acquire an additional 770 million the All World Index. Prada (1913 HK) Japan shares of SPIL (2325 TT) at NTD55 tumbled to a record low after three Takata (7312 JP) lost the confidence a share. SPIL was due to consider quarter earnings misses. China Vanke of one of its biggest former the offer at their upcoming board (2202 HK) shares were suspended shareholders, which said the company meeting on 28 December. However, as Baoneng, a Shenzhen-based had cut off access to management they have announced that they view investment firm, became the largest and downplayed risks as its air bags this as a hostile offer and do not see shareholder bringing the price to a spurred a record auto-safety recall. reasonable grounds for it. Demand in record high. The shares remained in Sawakami Asset Management (SAAM the renewable energy sector seen this suspension through the end of the JP) sold the last of its Takata shares in month in particular Motech (6244 TT) year. Guotai Junan (1788 HK) saw its early October, before a US regulator’s and Gintech 3514 TT. share price rise after its chairman crackdown on the company. returned from a 5-week absence Olympus (7733 JP) is to pay Funai Korea where he had been aiding Electric (6839 JP) JPY970 million Daewoo Shipping (042660 KS) an investigation. announced a share placement worth to settle a lawsuit over Olympus’s KRW 414.2 billion to employees and Australia falsified financial statements, while the Korea Development Bank. Shares Market interest remains focused on Pioneer (6773 JP) is to sell JPY15 rose after the announcement. mining and mining services, with billion of its convertible bonds and particular interest continuing in use proceeds from the sale to develop Singapore small and mid-cap names. Softening software and repay debt. Long-term interest in Noble Group iron-ore prices (along with other Other active names seen in the (NOBL SP) continued throughout commodities), China’s growth market included: the month. The commodity trader figures and China’s demand for raw lost almost two-thirds of its value, material are all correlated with the • Flight Centre (FLT AU) with its stock trading near the short interest in the mining names, • Slater & Gordon (SGH AU) lowest since 2008, after a year of with mining services names drawing attacks on its finances by critics, interest as large-cap miners looked to • Takata (7312 JP) including the anonymous Iceberg cut costs: • Sharp (6753 JP) Research and short-seller Muddy Waters LLC. The latest blow, amid a • Small- and mid-cap mining: rout in raw materials, was the cut in Whitehaven Coal (WHC AU), Paladin its credit rating to junk by Moody’s Energy (PDN AU), Energy World Corp on concerns over its liquidity. (EWC AU) and Atlas Iron (AGO AU).

Hong Kong • Large-cap mining: Fortescue Metals China Shipping (2866 HK) and China (FMG AU). Cosco (1919 HK) were reported to • Mining services: Monadelphous have had a merger plan approved Group (MND AU). by Chinese state council. Goldin Financial (530 HK) rose by the most Iron-ore prices lost 45% percent in more than six years on Tuesday the in 2015, falling 80% from their peak 8th, while its sister company Goldin in 2011. Properties Holdings Ltd. (283 HK) advanced as much as 32% in Hong

1 Bloomberg. January 2016 | Market Monitor 5

European equities

December began with disappointing rights issues continued to trade in Active stocks included: macro news from Mario Draghi and the first week of December ending the ECB announcing deposit rate cuts. on the 10th. • SOITEC (SOI FP; 4562294) • Nyrstar NV (NYR BB; B28QWN0) Oil and commodities prices generally Other rights issues trading during the fell further after the OPEC meeting in first couple of weeks of the month • Telecom Italia SPA Vienna, the Swiss National Bank kept were Solvay (SOLB BB) and Fioera (TIT IM; 7634394) its rates unchanged, and the Peoples Milano SpA (FM IM). • Abengoa SA (ABG/P SM; B83KH89) Bank of China signaled its intention • Meyer Burger Technology AG to loosen the yuan’s ties with the US New announcements, yet to be (MBTN SW; B5NC0D0) dollar and publish its value vs a basket ratified by shareholders, include CGG of currencies. SA’s (CGG FP’s) proposed EUR350 • Alstom SA (ALO FP; B0DJ8Q5) million rights issue and Fomento de • Fingerprint Cards AB Corporate activity news continued Construcy Contra’s (FCC SM’s) EUR710 (FINGB SS; 5489949) from November with Vonovia (VNA million rights issue. GR) shareholders backing the • TalkTalk Telecom Group managements offer for Deutsche Just prior to the holiday season, (TALK LN; B4YCDF5) the Fed finally raised rates by 25 Wohnen (DWNI GR) despite the • Frontline Ltd (FRO NO; 5561052) EUR1.2 billion portfolio acquisition bps, which was widely expected by • RIB Software AG from Patrizia Immobilien announced . Its message was sufficiently (RSTA GR; B03K783) last month. dovish with Chair Yellen stressing that policy adjustments would be gradual Lonmin’s (LMI LN’s) and Standard over time and that the central bank Chartered’s (STAN LN’s) respective would remain data-dependent.

European money markets and government bonds

Tri-repo collateralized by AA GC extended the APP (Asset Purchase consumption. GDP growth did slow sovereigns traded in the range of Programme), with a new 17 March a little in the summer, to 0.3%, from between -0.34 and -0.45% through soft-end date, a reinvestment strategy, 0.4% in Q2, and 0.5% in Q1, mainly most of December after the ECB rate- and also by broadening the scope of due to weaker exports (+0.2%, down cut came into effect on 9 December. eligible assets. It also communicated from an average of +1.5% the previous However, as we approached year-end, on the main refinancing operations and two quarters). Recent indicators it traded much softer between -0.40 3-month LTROs. The GC failed to live up suggest growth may re-accelerate to and -3.00%, as banks started to to the very dovish rhetoric developed somewhere between 0.4 and 0.5% in manage their balance sheets ahead of by a number of members recently. Yet, coming quarters. 31 December. Draghi indicated that more work would take place in the spring to “adjust some November headline HICP inflation 1 Economic commentary technical parameters”. was marginally revised higher to With regards to the ECB’s rate decision, 0.15% year-over-year, from a flash in particular the -10 bps deposit rate What next? We still see further easing, estimate of 0.14%, leading to a higher cut and balance sheet expansion, the most likely through two more deposit rounded print. This was in line with Governing Council (GC) cut the interest rate-cuts (taking it to -75 bps in 2016), Citi’s expectations, given the upward rate on the deposit facility to -0.3%. All a further six-month extension of revision to Italian data and smaller other rates (refinanced and marginal) purchases, and probably by a step-up countries’ HICP data released since were left unchanged. (+EUR15 billion) in monthly purchases. the flash estimate. Headline inflation increased from 0.12% in October. 2 President Draghi deflected a number Economic data Base effects in the energy component of questions as to whether the deposit Euro area Q3 GDP growth confirmed were largely offset by weak food and rate was at the lower bound. Four at +0.3% quarter-over-quarter, holiday-related prices. additional measures were taken — the seemed driven primarily by private

1 Citi Velocity. 2 Citi European Economics. For more information, contact your Citi representative.

David Martocci Rich Kissinger Gavin Callan Martin Corrall Managing Director Director Director Director Global Head of Agency Lending Agency Lending, Americas Agency Lending, EMEA Agency Lending, Asia Tel: +1 212 816 8960 Tel: +1 212 723 5287 Tel: +353 1 622 6119 Tel: +852 2868 8087 [email protected] [email protected] [email protected] [email protected]

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