Bank shares under pressure over Archegos worries
Bank shares dropped on Monday after a fire sale of stocks by a US investment firm rippled into loss warnings by two major investment banks.
Credit Suisse shares plunged almost 16 per cent after the bank said it faced large losses when its client Archegos Capital Management was forced into a huge unwinding of assets. Japanese bank Nomura also warned of a significant blow related to the fund, sending its shares down 16 per cent in the biggest sell-off on record.
This followed a $20bn fire sale on Friday triggered by Archegos, a private investment firm founded by former hedge fund manager Bill Hwang.
Wall Street stock markets’ reaction was muted, however. Investors said strong corporate earnings forecasts for this year and next, combined with President Joe Biden’s economic stimulus, may help stock markets weather what could be an idiosyncratic event involving one investment fund.
The blue-chip S&P 500 slid 0.4 per cent and the technology-focused Nasdaq Composite lost 0.3 per cent in opening trades.
“Given the broad market reaction, I think we can agree that contagion risk is manageable, which is something I always worry about when a large market participant is in distress,” said Anik Sen, global head of equities at PineBridge Investments.
“The macro and liquidity backdrops are solid right now,” he added, noting the enormous amount of fiscal stimulus filtering through the economy and the loose monetary policy being followed by the US Federal Reserve.
But the shares in top US banks underperformed as investors fretted about future losses from exposure to leveraged hedge funds. Morgan Stanley slid to the bottom of the S&P 500, losing 3.6 per cent, while Citigroup fell 2.3 per cent. European peer Deutsche Bank sank 3 per cent.
Tom Holland, of research house Gavekal, warned that brokers might have acted swiftly to reduce exposure to Archegos because they were fearful of “other deleveraging episodes”.
The ructions at Archegos follow a strong stock market rally, propelled by central bank liquidity and forecasts of a robust economic recovery, but also a rise in the use of margin debt to fund speculative stock purchases.
Romain Boscher, chief investment officer for equities at Fidelity International, said the Archegos situation highlighted that investors were grappling with whether to hold on to stocks because of the “reassuring earnings trend” or reduce equity exposure because of the need to “deal with market speculation”.
“I would not say markets are being driven by irrational exuberance but we are in a phase of exaggerated exuberance where there is too much cash at work,” Boscher said.
In Europe, the Stoxx 600 equity benchmark rose 0.2 per cent and the UK’s FTSE 100 fell 0.3 per cent.
Government bonds were also steady. The yield on the 10-year US Treasury, which moves inversely to its price, ticked up 0.02 percentage points to 1.68 per cent. Germany’s equivalent Bund yield rose 0.01 percentage point to minus 0.34 per cent.
The dollar, as measured against a basket of currencies, traded flat at around its highest since late November.
Brent crude, the international oil benchmark, fell 0.7 per cent to $63.87 a barrel after the Ever Given, the container ship blocking the Suez Canal, was refloated.
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