Closing Stock Market SummaryIt was a grind today for the stock market, but that doesn't mean it was a bad session. On the contrary, it was a good day for the stock market, which saw very little challenge from sellers outside of some individual stocks and the S&P 500 hit a new 52-week high.
Leadership from select mega-cap stocks, but principally Apple (AAPL 193.99, +3.30, +1.7%), Tesla (TSLA 290.38, +9.00, +3.20), and NVIDIA (NVDA 464.61, +9.92, +2.2%), made the difference for the Dow, Nasdaq, and S&P 500. Those indices, though, still found themselves looking up at the Russell 2000 (+1.2%), which outperformed on the back of strength in its financial and semiconductor components.
There weren't any meaningful news drivers to account for today's buying interest. Rather, it was more of the same buying on weakness and forging ahead on the hopeful notion that the U.S. economy will avoid a hard landing, that the Fed is close to done raising interest rates, and that earnings growth will return in the second half of the year.
Notably, the financial sector (+1.0%) was a pocket of relative strength in front of earnings reports from Bank of America (BAC 29.40, +0.29, +1.0%), Morgan Stanley (MS 86.37, +0.59, +0.7%), and Charles Schwab (SCHW 58.64, +0.12, +0.2%) before Tuesday's open. The SPDR S&P Bank ETF (KBE) gained 1.7% and the SPDR S&P Regional Banking ETF (KRE) gained 1.7%.
Those performances were a far cry from the hit that AT&T (T 13.53, -0.97, -6.7%) and Verizon (VZ 31.46, -2.55, -7.5%) took amid concerns about potential liabilities and financial risk related to the telecom industry's historical use of lead sheathed cables. Those concerns precipitated a downgrade of AT&T to Neutral from Buy at Citigroup and triggered a wave of retail and institutional selling in both stocks. AT&T traded nearly four times its average volume while Verizon traded more than four times its average volume.
The weakness in those names, and a loss in Alphabet (GOOG 125.06, -0.64, -0.5%), was responsible for the underperformance of the communication services sector (-0.7%).
Led by Apple and its semiconductor components, the information technology sector (+1.3%), which is the market's most heavily-weighted sector, sat atop today's leaderboard. The Philadelphia Semiconductor Index jumped 2.3%, extending its gains in the afternoon when NVIDIA emerged from negative territory. Before the open, Citigroup raised its price target on NVIDIA to $520 from $420.
Microsoft (MSFT 345.73, +0.49, +0.1%) eked out a gain after the 9th Circuit Court of Appeals rejected the FTC's appeal to uphold the block on Microsoft's acquisition of Activision Blizzard (ATVI 93.21, +3.14, +3.5%). It was also reported by Bloomberg today that the UK court has put a hold on the UK's veto vote of Microsoft's acquisition of Activision Blizzard. In any case, the small gain in MSFT was another support factor for the information technology sector.
Overall, there wasn't a lot buying support in the utilities (-1.2%), real estate (-0.9%), health care (-0.4%), or consumer staples (-0.3%) sectors, which underperformed in a lightly-traded session that nonetheless had more of a risk-on look to it than not despite word that China's Q2 GDP was weaker than expected and that Russia suspended its participation in the Black Sea grain agreement.
Advancers outpaced decliners by a roughly 4-to-3 margin at the NYSE and a roughly 7-to-4 margin at the Nasdaq. The Invesco S&P 500 Equal-Weight ETF (RSP) rose 0.2%; however, the Vanguard Mega-Cap Growth ETF (MGK) gained 0.6%.
- Nasdaq Composite: +36.1% YTD
- S&P 500: +17.8% YTD
- Russell 2000: +10.8% YTD
- S&P Midcap 400: +10.7% YTD
- Dow Jones Industrial Average: +4.3% YTD
Reviewing today's economic data:
- The July Empire State Manufacturing Survey checked in at a better-than-expected 1.1 (consensus -8.8), although that was a deceleration from the prior month's reading of 6.6.
Looking ahead to Tuesday, market participants will receive the following economic data:
- 8:30 a.m. ET: June Retail Sales
- 9:15 a.m. ET: June Industrial Production and Capacity Utilization
- 10:00 a.m. ET: May Business Inventories; July NAHB Housing Market Index
- 4:00 p.m. ET: May Net Long-Term TIC Flows
After Hours Summary: MASI -23% falls on weak guidance; SSYS +1.2% higher on news it will engage in discussions with DDD; ROST -4.4% lower on new store plansAfter Hours Gainers:
Companies trading higher in after hours in reaction to earnings/guidance: FBK +14.2%, ATRO +5.4%
Companies trading higher in after hours in reaction to news: KPTI +5.2% (receives FDA Fast Track Designation for Selinexor), PTCT +4.4% (names new CFO), BRY +3% (to acquire Macpherson Energy for $70 mln), AIR +3% (extends existing airframe MRO services relationship with UAL), NOC +1.5% (RTX and NOC awarded follow-on contract from DARPA), TDS +1.4% (provides update on the amount of lead-covered cables), SSYS +1.2% (SSYS to engage in discussions with DDD), AMLI +1% (defers spin out of Macusani), DM +0.5% (SSYS to engage in discussions with DDD)
After Hours Losers:
Companies trading lower in after hours in reaction to earnings/guidance: MASI -23% (issues downside Q2 revenue guidance), ELS -1.8%
Companies trading lower in after hours in reaction to news: CVM -17.7% (stock offering), ABOS -10.5% (stock offering), ROST -4.4% (opens 27 locations; plans to open 100 new stores in FY23), SVM -2.4% (reports high-grade silver-lead intercepts), DDD -0.6% (SSYS to engage in discussions with DDD), CDNA -0.5% (NTRA announces favorable court decision in false advertising case brought by CDNA), ATVI -0.5% (ATVI/MSFT deal will close later than expected, according to Bloomberg; also Warren Buffett lowered stake in ATVI), WOLF -0.4% (says its supply chain will not be impacted by proposed China export restrictions on gallium and germanium), MDT -0.3% (in sympathy with weak MASI guidance), MSFT -0.2% (ATVI/MSFT deal will close later than expected, according to Bloomberg), ARGX -0.1% (commences global offering of $750 mln of ordinary shares), BLK -0.1% (adds CEO of Aramco to its board)
- Nordea Bank (04Q TH) +3.1%
- Nordea Second-Quarter Profit Beats Estimates as Guidance Raised
- Vodafone (VODI TH) +2%
- Ryanair (RY4C TH) +1.7%
- National Grid (NNGF TH) +1.6%
- BAE (BSP TH) +1.4%
- GSK (GS71 TH) +1.1%
- Novartis Recovers, GSK Languishes as Fortunes Diverged in 2Q
- BAT (BMT TH) +0.7%
- Zalando (ZAL TH) -1.5%
- EDP (EDP TH) -1.5%
- Nel (D7G TH) -1.5%
- Aixtron (AIXA TH) -1.5%
- ASML (ASME TH) -1.6%
- Market Chatter: Netherlands to Limit ASML’s Repair Services
- Infineon (IFX TH) -1.8%
- Tomra (TMRA TH) -1.8%
- Bank of Ireland (BIRG TH) -2%
- Ericsson (ERCB TH) -2.2%
- Ericsson Cut to Equal-Weight at Barclays; PT 65 kronor
- AMS-Osram (DQW1 TH) -3.9%
DAX:
- Zalando (ZAL TH) -1.3%
- Infineon (IFX TH) -1.9%
- China’s Growth Disappoints, Fueling Calls for More Stimulus
MDAX:
- SMA Solar (S92 TH) -0.9%
- ProSieben (PSM TH) -1%
- HelloFresh (HFG TH) -1.1%
- Nordex (NDX1 TH) -1.2%
- Aixtron (AIXA TH) -1.4%
SDAX:
- Eckert & Ziegler (EUZ TH) +0.9%
- Energiekontor (EKT TH) +0.8%
- SAF-Holland SE (SFQ TH) -1.1%
- Dermapharm (DMP TH) -1.4%
- 1&1 (DRI TH) -1.5%
- Heidelberger Druck (HDD TH) -1.8%
- Draegerwerk (DRW3 TH) -2.1%
- Draegerwerk Prelim 2Q Net Sales About EU771M
>>> Up
* Amadeus Raised to Outperform at BNPP Exane; PT 77 euros
* Apple PT Raised to $220 from $190 at Morgan Stanley
* Bodycote Raised to Neutral at JPMorgan; PT 640 pence
* Chewy Raised to Buy at Goldman; PT $50
* Elisa Raised to Hold at DNB Markets; PT 50 euros
* Euronext Raised to Neutral at BNPP Exane; PT 64 euros
* HMS Networks Raised to Hold at ABG; PT 400 kronor
* HMS Networks Raised to Buy at DNB Markets; PT 500 kronor
* Investors House Raised to Buy at Inderes; PT 5.90 euros
* Johnson Matthey Raised to Buy at Deutsche Bank; PT 2,500 pence
* Lime Technologies Raised to Buy at DNB Markets; PT 300 kronor
* MorphoSys Raised to Hold at Deutsche Bank; PT 25 euros
* Ovaro Kiinteistosijoitus Raised to Accumulate at Inderes
* Paccar Raised to Buy at Jefferies; PT $115
* Spirax Raised to Overweight at JPMorgan; PT 11,900 pence
* Victrex Raised to Buy at Berenberg; PT 2,090 pence
* Yelp Raised to Buy at Goldman; PT $47
>>> Down
* Aker Solutions Cut to Hold at DNB Markets; PT 45 kroner
* Alcoa Cut to Neutral at JPMorgan on Weak Aluminum Fundamentals
* Ericsson Cut to Equal-Weight at Barclays; PT 65 kronor
* Kenmare Cut to Hold at Berenberg
* Kesko Cut to Hold at ABG; PT 19 euros
* Lundin Mining Cut to Hold at Paradigm Capital; PT C$12.50
* MSCI Cut to Underperform at BNPP Exane; PT $450
* Nokia Cut to Accumulate at Inderes; PT 4.10 euros
* PepsiCo Cut to Equal-Weight at Morgan Stanley
* Rotork Cut to Neutral at JPMorgan; PT 330 pence
* Spectris Cut to Underweight at JPMorgan; PT 3,100 pence
* WithSecure Cut to Accumulate at Inderes; PT 1.40 euros
>>> Initiation
* Alphabet Rated New Outperform at CICC; PT $151
* Cembre Rated New Buy at Berenberg, On Track For a Record Year
* Molson Coors Rated New Hold at Baptista Research; PT $74.10
* NatWest ADRs Rated New Hold at Baptista Research; PT $7.20
* UBS Rated New Buy at Baptista Research
>>> Call
* 888 Shares Plunge; Jefferies Notes Potential Existential Threat
* PepsiCo Downgraded at Morgan Stanley With Catalysts Played Out
* Victrex Raised to Buy at Berenberg as Earnings Approach Trough
Stocks in Asia declined after another round of weak data fueled concerns about recovery in China. The prospect of continued monetary tightening by the Federal Reserve also weighed on sentiment. Shares in mainland China were the worst performers in the region as investors parsed data that showed growth for the second quarter missed estimates. Gross domestic product expanded 6.3% in the second quarter from a year prior, weaker than the median forecast of 7.1% from economists surveyed by Bloomberg. The onshore and offshore yuan weakened. The People’s Bank of China earlier extended support for the currency, but kept its medium-term lending facility unchanged Monday despite mounting market calls for more stimulus. Shares fell in South Korea and were steady in Australia. Japanese markets are shut for a holiday while morning trading in Hong Kong is canceled due to a storm. Contracts for the S&P 500 and Nasdaq 100 were lower in Asia. The rally in US stocks hit a wall Friday after a report showed consumer sentiment climbed to an almost tThe dollar was little changed Monday after a gauge of greenback strength snapped a five-day losing streak Friday. The currency’s weekly slide has the index back near levels last seen in April 2022 as some strategists and investors suggest its long bull run is over. The yen edged higher after Bank of Japan Governor Kazuo Ueda said uncertainty remains high over the US and global economies. He also said there wased Governor Christopher Waller said last week he expected two more rate increases this year to bring inflation down to the 2% goal, though more good data on prices could obviate the need for the second hike. Swaps pricing show expectations the Fed is virtually certain to raise its benchmark rate by another 25 basis points when it meets this month, with a roughly one-third chance it will make one more such move before stopping its cycle.n’t much change in Japan’s bond-market functionality from the previous monetary policy meeting inoil extended declines as China’s growth disappointed and a major Libyan field resumed output. Gold was little changed.
Nikkei -0,09% Hang Seng +0,33% CSI -1,09% Shanghai -1,19% Shenzen -0,78%
Eur$ 1,1224 CNH 7,1804 CNY 7,1692 JPY 138,64 GBP 1,3087 CHF 0,8614 RUB 90,3317 TRY 26,1701 WTI$ 74,74 -0,7% Gold 1,952 -1,2% BTC 30,308 ETH 1,932
S&P -0,08% Nasdaq -0,06% EuroStoxx -0,63% FTSE -0,40% Dax -0,48% SMI -0,13%
Macro :
- EU’s Gentiloni: European Economy is Not Facing Stagflation
- UK Government Considers Scrapping Inheritance Tax, Times Says
- Biden Rejects Oil Refineries Seeking Biofuel-Blending Exemptions
- Crypto Stocks Notch Milestone Week on Positive Ripple Ruling
- Merger-Arb Funds See Tide Turning After FTC’s Big Legal Setback
- Modi and Macron Agree on 25-Year Plan to Deepen Cooperation
- Bitcoin-ETF Review Moves Forward as SEC Acknowledges Filings
Keep an eye on :
- 888 LN : 888 Shares Plunge; Jefferies Notes Potential Existential Threat
- ALTICE : Altice Portugal Starts Investigation on Procurement, Real Estate
- ARGX BB : Argenx Says Adhere Study of Vyvgart Meets Primary Endpoint
- AAL LN : *AMPLATS SEES 1H EPS BETWEEN 65% & 75% LOWER Y/Y
- BAKKA NO : Bakkafrost Prelim 2Q Operating Ebit Misses Estimates
- BAMI IM : Banco BPM, Iccrea, FSI in Pact for Payment Business
- CARLB DC : Russia Takes ‘Temporary’ Control of Danone, Carlsberg Assets
- CO FP : *NIEL-LED 3F GROUP DECIDES TO PULL OFFER FOR CASINO
- CO FP : Casino Union Criticizes Possible Takeover of Grocer by Creditors
- BN FP : Russia Takes ‘Temporary’ Control of Danone, Carlsberg Assets
- DRW3 GY : Draegerwerk Prelim 2Q Net Sales About EU771M
- FINGB SS : Fingerprint Resolves on Rights Issue, Covertible Bond
- FSRL US : Energix, First Solar Enter Framework Accord Valued at $1.5b
- GAM SW : GAM Holding Prelim 1H Underlying Pretax Loss CHF23M
- HMB SS : H&M Now Wants to Sell You Makeup, Sofas and Crocs - WSJ - https://bit.ly/44LoyBz
- ISN SW : Intershop Terminates Sales Talks for a Real Estate Property
- JSTL IN : India’s JSW Steel Said to Mull Bid for Stake in Teck Coal Unit
- MSFT US : FTC Loses Appeal Bid to Block Microsoft-Activision Deal
- MSFT US : Microsoft Agrees to Keep ‘Call of Duty’ on Sony Playstation
- NEXI IM : Nexi Mulls Sale of Italy’s Interbank Network, Corriere Says
- NDA SS : Nordea Bank 2Q Net Interest Income Meets Estimates
- OMV AV : Adnoc Confirms in Talks With OMV on Borealis, Borouge Merger
- PARA US : Paramount parent reportedly in talks to rearrange debt on risk disclosure
- PFE US : Pfizer’s Seagen Takeover Plan Faces Further Antitrust Scrutiny
- PIRC IM : Tacticum Investments Cut Pirelli Stake to Zero From 4.3%: Filing
- PROX BB : Proximus To Buy Majority Stake in Route Mobile for $721 Million
- Raisin Gmnbh : Goldman-Backed Fintech Raisin to Boost Deposits to €50 Billion
- CFR SW : Richemont 1Q Sales at Constant Exchange Rates Beats Estimates
- SAN SM : Santander Plans to Hire 20-30 Bankers in Europe: Financial News
- SIE GY : Siemens Ends Ties to Chinese Defense Company Transemic: HB
- STMN SW : Straumann Group Names Kraft Heinz Executive Yang Xu as CFO
- SPSN SW : Swiss Prime Prelim 1H Vacancy Rate 4.1%
- TIT IM : Apple Acquisition Pitch Was High-Water Mark for Telecom Italia
- TSLA US : Tesla Hits ABS Market in First Debt Sale Since Blue-Chip Upgrade
- TOM2 NA : TomTom Boosts FY Revenue Forecast, Beats Estimates
- UBSG SW : UBS Picks EY as Auditor for Combined Credit Suisse Business: FT
Ukraine’s urgent need for supplies lays Europe’s defence industry bare
War has spurred policymakers and companies into action but production will take years to match demand
The UK’s war effort for Ukraine has its frontline on the site of a former Dunlop tyre factory in the north-east of England.
Here, at BAE Systems’ plant in Washington, workers are manufacturing hundreds of 155mm artillery shells for the Ministry of Defence. The British government, along with other Nato allies, has been sending thousands of rounds from national stockpiles to Ukraine to help its armed forces in their fight against Russia.
More than 16 months after Russia’s invasion, the artillery rounds have become the workhorse ammunition of the war and emblematic of the efforts of Europe’s defence industry to expand production of everything from munitions to tanks to meet the demands of their governments.
“‘I have seen this site go through Afghanistan and Iraq, and now Ukraine,” said Lee Smurthwaite, programme director for munitions at BAE Systems. “The site is as busy as it’s ever been and it’s going to be a lot busier.”
Ammunition crunch
This rush is mirrored across the continent as factories have stepped up output to replenish national stockpiles that are running low. EU foreign and defence ministers in March agreed an ambitious target to supply 1mn rounds of ammunition to Ukraine within a year.
In Germany, defence manufacturer Rheinmetall is already working on new production lines and received a munitions order worth up to €4bn from the German government this week. BAE, meanwhile, secured a £190mn order from the UK to help it increase output of the 155mm-diameter rounds, although the company had already upped investment in its munitions production ahead of time. “We just got on with it,” said Smurthwaite.
A new previously planned machining line at Washington will now be dedicated solely to making 155mm shells. The site makes the shells for the rounds which are then filled with explosive at BAE’s site in Glascoed, south Wales. BAE does not supply Ukraine directly but has a long-term partnership with the Ministry of Defence that underpins production.
More orders are now being placed, but it has taken time to get here.
Industry executives say that despite national pledges to increase defence spending — it hit an all-time high of $2.24tn globally last year — and new procurement initiatives by both Nato and the EU, progress has been slow.
European industry is “more or less still facing the same challenges and roadblocks” some 16 months since the war started, according to Jan Pie, secretary-general of regional trade body ASD.
While the situation is very urgent in Ukraine, European countries are “still operating by peacetime processes”, he said.
Efforts to move production lines to a war footing have also been frustrated by supply chain problems and fragmented policymaking.
Micael Johannsson, chief executive of Swedish defence group Saab, said the industry needed to co-operate more closely on supply lines to reduce bottlenecks. Companies should work together to figure out “how do we prioritise, can we schedule it, can we co-invest” and to help inform governments about bottlenecks and where to prioritise investment, he told the Financial Times last month.
Alex Cresswell, UK chief executive of French defence group Thales told an industry conference last month that governments should move away from a generic weapons “stockpiling” and focus instead on “genuine sharing [of] supply chains”.
Susanne Wiegand, chief executive of Germany’s Renk, which makes transmissions for tanks, including the Leopard 2, said the industry needed “more planning certainty from policymakers”. Renk, she added, was in favour of a permanent government and industry task force that would work together on speeding up procurement and delivery.
National rivalries
The ammunition crunch is driving much of the current debate about resilience but there will be demands for new weapons in the longer term.
Ukraine’s armed forces will need to be rebuilt after the war, while Nato has already indicated that it wants to increase its high-readiness forces. All of this implies more weapons and more investment.
Yet pan-Europe defence collaboration faces significant hurdles. The EU has been trying to develop the bloc’s capacity for independent military action and strategic autonomy since the launch of its common security and defence policy in the late 1990s. Defence spending, however, is still controlled by each member state, while national rivalries continue to dominate, undermining joint procurement initiatives.
One European defence official said: “When we say in Brussels to each other that we . . . [want] better co-operation . . . nations are still promoting and procuring their own stuff.”
“There was no real European co-operation in times of austerity, when the defence industry was small and everyone said they had to protect national autonomy,” commented an executive at a German defence group.
“Now we have the opposite situation, where there’s a lot of money but everyone’s saying let’s keep the money in the country and not give it to others — even if they’re allies. It didn’t work in bad times and it doesn’t look like it’ll work in good times.”
Michael Schoellhorn, chief executive of Airbus Defence and Space, said that there needed to be more collaboration across Europe, adding that new money coming into the sector because of the Ukraine war had fuelled a tendency to focus on national champions.
Although Airbus is benefiting from the higher spending, “we have to concede that the European card that we play is currently not resonating so much with our home countries right now”.
There are also concerns that procurement decisions in favour of the US will undermine any European plans to bolster its industrial base.
“What I’m asking for is balance,” said Schoellhorn. “If there is a need to buy off the shelf because it’s a crunch need, and that’s the only thing available and it works, fine.”
Europe needs to decide whether “we want long-term core competencies that we will develop over a long horizon”.
A Germany-led plan announced last year, dubbed the European Sky Shield initiative, to buy Patriot missile systems from the US, Iris-T missiles from Germany and the Arrow from Israel, blindsided France and excluded MBDA, a pan-Europe group that has been making a Patriot competitor.
Schoellhorn said the initiative was a “good thing in my view” given that the Ukraine war had “amplified the need to do more on air defence”. Nevertheless, he said he wished there had been “more discussion and ultimately collaboration . . . also between France and Germany”.
The Sky Shield initiative “should ideally also entail some of the capabilities that we have in Europe with MBDA and others because we can contribute”.
He added that although the importance of an industrial strategy for defence was now being recognised in Germany, the country “has had a deficiency . . . in terms of long-term strategic thinking when it comes to defence and foreign policy and security”.
Airbus is a partner of Germany’s Diehl on the Iris-T missiles. It also has a stake in MBDA.
Access to finance
For European industry, there is another significant challenge: access to finance as banks and fund managers have bought into the trend for socially responsible investing. Before the war, executives had begun to worry that the sector was in danger of becoming “uninvestable” for funds because of ethical questions around defence investment.
Although the war has changed the view of some investors, industry body ASD says more needs to be done. “If you want to see this increased production, then also you need access to private finance,” Pie said.
The association has been calling for a change in the lending policy of the European Investment Bank to encourage private investors. It also wants the European Commission to make a joint statement with the EU diplomatic service that “investment in defence is compatible with EU sustainable finance regulation”, Pie added.
After Ukraine
The war may have spurred Europe’s policymakers and companies into action but the reality is that production will take years to match the sudden jump in demand. Industry also needs to persuade governments that defence is not just an insurance policy at times of war.
When the cold war ended, the result was “shrinking defence budgets, shrinking orders and a reduction in force structure and a much smaller home market”, said Bastian Giegerich, director of defence and military analysis at the International Institute for Strategic Studies.
“That is what companies will have in mind — the threat environment had changed and EU armies turned themselves into contributors to non-essential crisis management missions around the world. It is no surprise that they are now thinking, should this war end, will we see the same thing happen?”
Market maker Citadel set to accelerate credit trading transformation
High-frequency firm started offering US investment-grade bond trading to clients in June
Citadel Securities’ entry into America’s $10tn corporate bond market looks set to turbo charge an electronic trading revolution in an asset class once dominated by large banks and telephone transactions, say investors and industry executives.
Ken Griffin’s high-frequency market-making firm, which acts as an intermediary between buyers and sellers of assets and handles $463bn in trades each day, started offering US investment-grade bond trading to clients in June.
The move points to the changes taking place in the analogue corporate debt market, which is decades behind equities in embracing electronic trading.
It also marks a new frontier for billionaire Griffin, whose firm has been a beneficiary of the move to high speed trading in stocks. The business, which is widely viewed as heading for a public listing, handles about one in four US stock trades.
Meanwhile, his hedge fund Citadel, which is run separately to the market maker and trades a wide range of assets, was earlier this year named as the most successful hedge fund firm of all time after making $16bn in profits for its investors.
“From our perspective it was only a matter of time before [Citadel Securities] felt like the credit markets were ready for them to enter and make an impact too, and my instinct is with a firm like Citadel, they’re only going to enter into a marketplace when they feel like they can make a sizeable and real impact,” said Billy Hult, chief executive of bond trading platform Tradeweb.
The move by Citadel Securities, which last year sold a $1.2bn stake to venture capitalists Sequoia and Paradigm, valuing the firm at about $22bn, has been facilitated by a rush of technological change in a market that, until recently, had made only halting progress since the first electronic trading venues were launched in the early 2000s.
For decades, corporate bond transactions were handled almost entirely by phone, with poor liquidity and the huge range of debt instruments available making electronic trading difficult.
But industry veterans say that the shift from stodgy analogue dealmaking to electronic trading has picked up momentum following a coronavirus pandemic-era surge, with help from so-called alternative liquidity providers such as market maker Jane Street.
“Our initial focus is investment-grade [credit] where we have the highest overlap with our existing fixed-income [exchange traded fund] business,” said Bob Cariste, head of fixed-income ETF trading at Citadel Securities. “High yield has the second most overlap, so it’s a very natural next step in the process.”
Patrick Moley, senior research analyst at Piper Sandler, said the entrance of a large market maker such as Citadel “has the potential to drive volumes higher on these platforms”.
“A lot of these larger ticket-size trades, $3-5mn trades, are being done over the phone by banks . . . there has to be an incentive for those larger-ticket trade sizes to go electronic,” he said, adding that liquidity is required “and that’s helped by market makers coming into the ecosystem”.
Already, the overall share of electronic trading in US investment-grade credit has climbed from 21 per cent in early 2019 to 45 per cent at the end of 2022, according to data from industry watchdog Finra. And while the riskier $1.4tn junk bond market is taking longer to shift gears, the proportion of high-yield credit traded electronically rose from 12 per cent to 35 per cent over the same period.
The push towards electronic trading in credit has been fuelled by two critical factors. First, the advent of fixed-income ETFs has produced a liquid and transparent market for shares in those funds, which can be traded like a single stock or redeemed for the underlying bonds — typically a basket of about 100 securities.
The resulting infrastructure for pricing and trading those ETFs has laid the groundwork for the second important enabler of electronification: portfolio trading. This is a highly lucrative and rapidly growing practice in which large bundles of bonds are electronically priced, with the underlying securities trading simultaneously in a single transaction.
“Electronic trading in the bond market has historically been traders using electronic platforms to engage dealers in a [request for quote] format where they are manually trading,” said Chris Concannon, chief executive of trading platform MarketAxess. “They’re now using full automation. This has been over the last couple of years growing quite aggressively.”
Citadel Securities’ entry into investment-grade credit builds on its existing business in market making for fixed-income ETFs, which already required it to act as a market maker in those funds’ underlying bonds. Jordan Cila, global head of fixed-income distribution at the firm, said that of the 100 clients for its credit business, “much of that has been clients onboarded from our existing client base”.
Cila said the firm was aiming to sign up about 350 clients — about a third of its global client base — by the year’s end. “We are not limited by client demand but more dependent on how quickly we can expand while making sure the client experience is of the highest quality.”
The opportunity in credit for firms such as Jane Street and Citadel Securities has widened as regulations following the 2008 global financial crisis have pushed big Wall Street banks away.
John McClain, a portfolio manager at Brandywine Global Investment Management, described Citadel’s entry into investment-grade credit as a “natural progression” but added that high-yield corporate debt was “a different animal. The quality of data in high yield is severely lacking relative to investment grade.”
Citadel’s Cariste acknowledged the market for high-yield credit was “less electronified and more idiosyncratic, so it requires some further refinement in how we’re leveraging our existing franchise”. He said “the goal” is to launch trading in investment-grade credit at about the end of the third quarter or early in the fourth quarter, “then single bonds and portfolio trading in high yield credit” later that quarter.
However Citadel Securities’ new venture fares, global fixed-income markets have reached a “tipping point”, according to Audrey Blater, a senior data analyst at analytics company Coalition Greenwich. Even traders reluctant to trade electronically now recognise “that the writing is on the wall”, she wrote in a recent note.
“It used to be fun to go to the music store and browse CDs and tapes,” said Blater. “But would you ever give up on-demand streaming music to get that experience back? Unlikely.”