Global shares edge higher as investors look past Archegos shockwave to COVID-19 developments, while US tech shares ease

trader Gregory Rowe

Global stocks rose on Tuesday, as investors shrugged off worries about wider fallout from the $35 billion Archegos default to focus instead on the worldwide progress of the COVID-19 vaccination program.

Futures on the Dow Jones rose 0.2% and the S&P 500 was about flat, suggesting a mixed open for US indices later in the day, while futures on the Nasdaq 100 fell 0.5%, pointing to a lower start for the technology sector. The Dow Jones hit an all-time high on Monday, but the tech-heavy Nasdaq saw a bigger pullback.

A spokesperson for Archegos, the family office of “Tiger cub” Bill Hwang, told Bloomberg in an email “all plans are being discussed” to determine the best path forward. Shares in banks linked to the risky trades didn’t see as much of a decline as Monday, when the financial sector was among the worst performing sectors of the European stock market.

US regulators have called in the banks involved for a “fireside chat,” according to Jeffrey Halley, a senior market analyst at OANDA.

Meanwhile, ViacomCBS fell a further 6.6%, losing more than half its value since a week ago, and Discovery fell another 1.6%.

“Just because markets appear to have moved on this morning, doesn’t mean the dust has settled on Archego Capital’s collapse,” Connor Campbell, a financial analyst at SpreadEx, said. “That situation could still have some nasty surprises up its sleeve.”

Separately in the US, President Joe Biden is expected to deliver a speech on infrastructure spending on Wednesday. The plan could cost as much $4 trillion in new outgoings and include $3.5 trillion in tax hikes, according to the Washington Post. The administration is not expected to expand the child tax credit permanent. Investors are also anticipating the next non-farm payrolls scheduled to release on Friday.

The 10-year US Treasury yield continued its march higher, rising 5 basis points to 1.77%, its highest since the start of the pandemic just over a year ago.

While Europe is at the forefront of a potential new wave of coronavirus infections, the US Center for Disease Control and Prevention has also warned the country risks facing a fresh wave of cases.

In the UK, Prime Minister Boris Johnson said he was hopeful no more lockdowns would be required as the country took its first significant step of easing out of restrictions on Monday.

London’s FTSE 100 rose 0.7%, the Euro Stoxx 50 rose 0.5%, and Germany’s DAX rose 0.6%.

The Ever Given ship in the Suez Canal was finally freed by a huge dredging vessel after being stuck for nearly a week, allowing normal traffic to resume. But the canal authority says it could take multiple days to clear out the backlog of ships that had built during the blockage. Oil prices were mostly tepid, with Brent crude falling slightly by 0.2% to $61.45 and West Texas Intermediate falling 0.1% to $64.87.

Asian markets received a boost from the Suez Canal news, helped by ByteDance’s latest $250 billion valuation in the private market. China’s Shanghai Composite rose 0.6%, Japan’s Nikkei rose 0.2%, and Hong Kong’s Hang Seng rose 0.8%.

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Mohamed El-Erian says the Archegos blow up is a ‘one-off’ but it may lead to tightening financial conditions as banks become more cautious

Mohamed El-Erian
Mohamed El-Erian, Chief Economic Advisor of Allianz and Former Chairman of President Obama’s Global Development Council, speaks during the Milken Institute Global Conference in Beverly Hills, California, U.S., May 1, 2017.

  • Mohamed El-Erian said the Archegos blow-up is a “one-off” in a CNBC interview Monday.
  • The Allianz chief economic adviser added he doesn’t believe it will lead to a “fast-moving contagion” in the markets.
  • El-Erian did warn investors about “tightening financial conditions” if banks become more cautious as a result.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

Mohamed El-Erian says the Archegos blow-up is a “one-off,” but it may lead to a tightening of financial conditions as banks become more cautious.

Over the weekend reports came out that showed Archegos Capital Management had been behind roughly $20 billion worth of block sales of companies like ViacomCBS and several Chinese tech stocks including Tencent and Baidu.

The sales came after the hedge fund failed to meet margin calls from Credit Suisse, Nomura, and Goldman Sachs.

Queen’s College President and Allianz chief economic advisor told CNBC on Monday that he believes the incident was a “one-off,” caused by Archegos’ “highly concentrated positions”, “massive leverage”, and “derivative overlay on top of that.”

El-Erian said that he doesn’t see a “fast-moving contagion” spilling over and creating a significant market sell-off, adding that “for now it looks contained.”

The Allianz chief economist did say investors should be keeping an eye on “slower-moving contagion forces” which might cause a “tightening in financial conditions” forcing banks to become more cautious.

“There’s been so much liquidity sloshing around the system that there has been excesses and we’ll get fender benders like this one, but what we don’t want is a pile-up, and that’s why it’s really important to look at these slow-moving contagions,” El-Erian said.

El-Erian said he hoped the Archegos blow-up would lead to “better discipline in the marketplace because we’ve lost a lot of discipline.”

He added that Archegos’ positions, overall, are a “small” portion of the market, but said it could cause banks to make changes.

“I can tell you that in a lot of investment houses right now, and banks, people are being asked look how we are positioned, who are we exposed to, do we have enough margin, is the collateral moving or not, and all that causes somewhat of a slowdown in the system,” El-Erian said.

When asked what caused Goldman Sachs to force the liquidation when it did, the Queen’s College President said that “price action”, “how big was the margin overall”, and desire to move first and catch other banks “offsides” was the reason Goldman made its liquidation call.

Goldman Sachs told Bloomberg that its losses from the Archegos liquidation were “immaterial” while Nomura and Credit Suisse both face “significant” losses after the blow-up.

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US stocks fall after a $30 billion wave of selling tied to hedge-fund Archegos rattles traders

NYSE trader worried
  • US stocks fell on Monday as traders braced for the after-effects of a selling-spree tied to hedge fund Archegos.
  • Archegos is the family office of former Tiger Management trader Bill Hwang.
  • Nomura and Credit Suisse shares tumbled after the banks warned of large losses linked to the fire-sale.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

US futures edged lower on Monday after an extraordinary $30 billion selling-spree by the hedge fund of Tiger Management trader Bill Hwang rattled investors around the world, while the refloating of a giant container ship stuck in the Suez Canal weighed on oil.

Futures on the Dow Jones, S&P 500, and Nasdaq fell between 0.4% and 0.6%, suggesting a lower open for US indices at the start of trading later in the day.

The sell-off appears to have been caused by Archegos Capital, run by the South Korean billionaire Hwang, which uses a long-short equity strategy that reduces exposure to movements in the overall market.

Typically under such a strategy, if long positions decline in value by more than the shorts, this puts them in a risky situation because they won’t have enough money to cover their shorts. The fund’s brokers, including Goldman Sachs and Morgan Stanley, realized this was about to happen, and so initiated margin calls. When Archegos couldn’t make them, the banks then forcibly sold off large holdings in the fund to stop the bleed.

Archegos had large long positions in Chinese and US stocks, including media firm ViacomCBS and Discovery. Both stocks saw their largest-ever daily declines on Friday, with each falling by more than 27%. Traders are now scrambling to figure out whether these fire-sales are over and seeing how much more the hedge fund has to offload.

A number of banking stocks tumbled after Nomura and Credit Suisse warned of large losses following Archegos’ extraordinary fire-sale. Nomura fell 16%, Credit Suisse fell 9.5%, Deutsche Bank fell 5%, and UBS fell 4%.

Wall Street’s VIX Index – popularly known as the ‘fear gauge’ – rose 10% to 20.78 on Monday, signalling a rise in the market’s expectations of volatility in the coming 30 days. The higher the index, the more nervousness is in the market.

Separately in the US, President Joe Biden is due to deliver a speech on Wednesday unveiling his new $3 trillion infrastructure plan that is part of his “Build Back Better” agenda.

Investors are still worried over concerns of rising number of COVID-19 cases in multiple regions in Europe, raising the prospect of further restrictions and curbs on economic activity. The continent is faced with a potential third wave driven by new variants. German Chancellor Angela Merkel said in a Sunday interview she would use federal law to take control of the pandemic response.

Lockdown restrictions in the UK have now eased slightly as groups of up to six people are allowed to meet outdoors. But markets displayed a lack of enthusiasm. “This early reticence may be tied to the Archegos Capital situation,” Connor Campbell, a financial analyst at SpreadEx, said. It remains to be seen which companies might be the next to announce they too have been stung, he said.

The UK’s FTSE 100 fell 0.4%, the Euro Stoxx 50 rose 0.1%, and Germany’s DAX rose 0.2%. The VDAX-New, the German equivalent of the VIX, was last up nearly 6% on the day.

Oil prices fell after the Ever Given container ship blocking the Suez Canal was successfully refloated, according to Inchcape Shipping Services. The ship, which has been stuck for almost a week, is currently being secured. Brent crude futures fell 0.6% to $63.99, while West Texas Intermediate dropped 1.2% to $60.27. The vessel, which is said to be longer than the Eiffel Tower, had obstructed the canal – one of the world’s most important shipping passages – since Tuesday.

Asian equity markets rose despite Chinese geopolitical worries and the forced liquidations on Wall Street, perhaps from the boost that the container ship has been refloated. Roughly 12% of total global trade passes through the canal, a large portion of that is from Asia’s big exporters to their customers in Europe. China’s Shanghai Composite rose 0.5%, Japan’s Nikkei rose 0.7%, and Hong Kong’s Hang Seng was about flat.

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