- 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.
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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.
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.
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.