A very large family fund
Was clearly surprised and quite stunned
When bankers said, Pay
The money today
You owe, or you soon will be shunned
Turns out, though, no money was there
So bankers then went on a tear
They sold massive blocks
Of certain large stocks
And warned levered funds to beware
Meanwhile in the Suez Canal
The ship that had caused the grand mal
In trade supply chains
Is floating again
Though not near its final locale
There is a blend of good and bad news in markets today, at least with respect to broad ideas regarding risk. On the plus side, the Ever Given is no longer completely wedged into the sand in the Suez Canal, with the stern of the ship back in the water. While that is clearly a positive, the bow of the ship remains lodged in the bank and is the target of the salvage teams working to extract it. Once that is accomplished, which may still take several more days, it will then need to undergo a series of tests to insure that no significant damage was done to the hull and that it won’t run into problems further along its journey. In the meantime, more than 450 ships are waiting to pass through the canal in both directions, so it will take a few weeks, at least, for supply chains to get back to their prior working timelines. But at least this is a step forward.
On the less positive side, stories about a remarkable liquidation of equity positions are filtering out of the market regarding a family office called Archegos, which was run by a former Tiger Investment fund manager and managed a huge long/short portfolio of equities on a highly levered basis. (n.b. a long/short fund is a strategy where the manager typically selects specific companies in a sector, or sometimes sectors against each other, to bet on the relative performance of one vs. the other). It turns out that a number of these positions moved against the fund and margin calls were made for billions of dollars that could not be met. The result was a massive liquidation of some individual stock positions, apparently in excess of $30 billion, with remarkable impacts on those names.
While only the funds brokers will mourn its passing, as it was a massive fee payer, it does highlight the potential disruption that can occur when leverage goes awry. And of course, leverage going awry simply means that stock prices decline. One of the things that central bank largesse has fomented that does not get a great deal of press, is the extraordinary growth in the amount of margin purchases that are outstanding. According to FINRA data, since the nadir in the 2009 GFC, margin debt has grown 375% while the S&P 500 has risen just under 200% (both of these are in real terms). While Archegos is only the first to break, do not be surprised if/when other funds run into similar problems because their particular set of investments didn’t pan out. The takeaway here is that there is a great deal of risk embedded into the system, and much of it is hidden from view. Risk management (aka hedging) remains a critical part of portfolio management, and that is true for corporate treasuries as well as for fund managers.
Now, on to the day’s price action. Equity markets are mixed, though starting to look a bit better as early losses in Europe have turned around. Asia saw modest gains (Nikkei +0.7%, Hang Seng 0.0%, Shanghai +0.5%) and now Europe is picking up, with the three main indices (DAX, CAC, FTSE 100) all higher by 0.5%. However, in the US, there still appears to be some fallout from the Archegos mess, with futures all pointing lower by about 0.4%.
In the bond market, Treasury yields have slipped 2.5 basis points this morning as there is clearly some haven appeal, although European sovereigns, with those equity markets performing well, have seen yields edge higher, but by less than 1 basis point. Clearly, the bond market is not a point of interest today given the activity in stocks.
Oil prices (+1.1%), which had briefly fallen on the initial reports of the refloating of the Ever Given, have since rebounded as it has become clear that ships will not be moving through the canal anytime soon. Metals prices are mixed, with precious metals still under pressure, while base metals have shown more resilience as gains in Al and Sn offset losses in Cu and Zn. (I’ll bet you didn’t think you would need to remember your periodic table to read about finance!)
As to the dollar, it is generally higher this morning, with gains across most currencies in both the G10 and EMG blocs. In the developed world, SEK (-0.5%) is the laggard as concerns over the next wave of the Covid virus spread, which is becoming a theme on the Continent as well. The euro (-0.2%) continues to slide slowly as the 3rd wave (4th wave?) of Covid makes its way through Germany and other nations, and further discussions of more restrictive lockdowns continue. On the plus side, GBP (+0.35%) is the leading gainer as the UK takes yet another step toward reopening the economy, by relaxing a few more restrictions.
In the Emerging markets, MXN (-0.8%) and TRY (-0.75%) are the laggards with the former under pressure due to some legislative proposals that will tighten the government’s grip on PEMEX, while the lira is suffering as the market starts to build expectations for a rate cut under the new central bank governor. But the CE4 are all weaker, showing their high beta relationship to the euro, and a number of APAC currencies, including CNY (-0.3%) are weaker as well.
On the data front, there is a great deal of info this week, culminating in the payroll report on Friday.
|Tuesday||Case Shiller Home Prices||11.35%|
|ISM Prices Paid||82.0|
|Average Hourly Earnings||0.1% (4.5% Y/Y)|
|Average Weekly Hours||34.7|
So, plenty to learn and clearly, the latest stage of reopening of the economy has economists looking for a substantial amount of jobs growth. Of course, even if this forecast is accurate, Chairman Powell is still going to be looking for the other 9 million jobs that have disappeared before he considers tightening policy. It remains to be seen if the market will continue to tighten for him. After a deluge of Fed speakers last week, each and every one explaining they would not be changing policy for a long time and that there was no concern over potential rising inflation, this week sees only a handful of Fed speakers, with NY’s John Williams arguably the most influential. But I don’t expect any change of message, which has clearly been drilled into the entire committee.
While broad equity indices have not suffered greatly, I cannot help but believe that the Archegos situation will give some people pause in their ongoing accumulation of risk. While not looking for a crash, I expect that we will see choppy markets amid reduced liquidity and would not be surprised to see a bit more risk reduction. In that environment, the dollar should remain broadly bid.
Good luck and stay safe