Preferreds slump amid China’s growth slowdown, North Korea’s atomic bomb test; RBS eyed

By Stephanie N. Rotondo

Seattle, Jan. 6 – Preferred stocks reversed course Wednesday, trending downward with the broader markets amid increased concerns about China.

Earlier in the week, China released weak PMI figures, which resulted in a 7% decline in the country’s equity markets. The government stepped in at that point, halting trading. The country’s currency was also devalued, causing an already jittery market to further fret that a growth slowdown in the Asian nation could have a global impact.

Also playing a role was North Korea’s claim that it had tested a hydrogen bomb – or the “H-bomb of justice,” as it was deemed in a state-released press statement. If confirmed, such a test would likely increase tensions throughout Asia – and potentially add to the discord in the Middle East.

“I thought we might see some selling pressure with the flight to quality after all this nonsense in Korea,” a trader said.

However, he further commented that the reaction was “not much.”

The Wells Fargo Hybrid and Preferred Securities index ended off 30 basis points, or about 7.5 cents on average for $25-par paper. By comparison, equities were down more than 1% across the board and domestic crude oil prices were more than 5% weaker on the day.

In fact, domestic crude prices dropped below $34 a barrel, a decline of 5.5% on the day. Prices have not been that low since 2008.

The weakness was due in part to concerns about China and North Korea, but also to the latest report from the U.S. Energy Information Administration. While the newest figures show U.S. crude stockpiles declined by 5.1 million barrels last week, another 10.1 million barrels of gasoline were added to inventories.

In preferred dealings, Royal Bank of Scotland Group plc’s 6.08% noncumulative guaranteed trust preferred securities (NYSE: RBSPG) bucked the day’s trend, inching up 2 cents to $24.94. However, HSBC Holdings plc’s 8% perpetual subordinated exchangeable capital securities (NYSE: HSEB) were down 7 cents – in line with the day’s average – trading at $26.16.

The Goldman Sachs Group Inc.’s 6.375% series K fixed-to-floating rate noncumulative preferreds (NYSE: GSPK) were meantime off well more than average, dropping 26 cents, or nearly 1%, to close at $27.88.

In terms of volume, it appeared to be picking up despite the softer tone of the marketplace. ETF trading continued to be active, with shares linked to S&P’s iShares U.S. Preferred Stock index (NYSE: PFF) trading 2.65 million times.

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