Credit Suisse and Nomura warn of losses after as hedge fund fire sale – as it happened

A late PS: Financial regulators across the world are monitoring the collapse of the New York-based billionaire Bill Hwang’s personal hedge fund, which left some of the world’s biggest investment banks nursing billions of dollars of losses.

The US Securities and Exchange Commission on Monday said it had been “monitoring the situation and communicating with market participants since last week” as panic spreads about the possible scale of the fallout from the forced liquidation of Hwang’s Archegos fund.

Japan’s chief cabinet secretary, Katsunobu Kato, said the Japanese government was carefully monitoring the situation at Nomura and that the Financial Services Agency would share information with the Bank of Japan.

The Swiss financial regulator, Finma, said it was also monitoring the situation, and warned that several banks and locations internationally were involved.

And finally, shares in Credit Suisse have closed deep in the red, down over 13%.

That’s a hefty selloff, following its early morning warning that a significant, but unnamed, US-based hedge fund had defaulted on margin calls made last week.

US-listed shares in Nomura are also under heavy pressure, down 13.5%, after it warned it faces a ‘significant’ loss from an unnamed US client.

But the wider market is still holding up pretty well, with the S&P 500 index currently down just 0.4% (financial stocks are still weaker).

Joshua Mahony, Senior Market Analyst at IG, says the Archegos Capital margin call sell-off has led to fears over substantial losses in the banking sector.

Banking stocks in the US have lagged on concerns that the sector could be hit hard after hedge fund Archegos Capital were forced to sell huge positions in US and China stocks. While Nomura and Credit Suisse warned of heavy losses in response to this crisis, Morgan Stanley’s disclosure that they also sold billions of shares sparked a widespread move out of banks.

The question for investors is just how widespread this will turn out to be, with Nomura admitting that they are not finished unwinding positions in a move that could ultimately cost the bank $2 billion. However, today’s decline in banking stocks does provide a potential opportunity for some, with the pro-cyclical nature of the sector meaning that we are likely to see outperformance for financials as economic data, rates, and yields rise.

That’s all for today. Here’s our news story about the margin call drama:

US journalist Charles Gasparino has put his finger on the underlying issue -- how could a family office build up such significant positions in US listed companies, using derivative contracts, without it being better disclosed?

In London, the FTSE 100 index has closed just 4 points lower at 6736 points.

It wasn’t the most eventful day in the City - housebuilders, miners and travel companies fell, while defensive stocks such as utilities, tobacco firms and consumer goods makers rallied.

Danni Hewson, financial analyst at AJ Bell, says its no surprise that Wall Street lost ground this session:

“Rumours continue to swirl about exactly which companies have been caught up in the Archegos saga and how badly. So far, it’s the investment banking sector bearing the brunt with Morgan Stanley and Goldman Sachs both trading down.

“There are already questions being asked about why so called ‘family offices’ are exempt from much of the scrutiny enjoyed by hedge funds and calls for the system to be tightened. With the numbers quoted today suggesting as much as $6tn is currently under the management of such firms, there is the expectation change must come quickly.”

The oil price has dipped again, on relief that the Suez Canal has finally been unblocked.

Brent crude has slipped by 1%, back below $64 per barrel as the Ever Given resumes her journey and heads for a technical inspection, while US crude is down almost 1% at $60.40 per barrel.

Here’s our latest story on the trouble in the Suez:

Salvage teams on Monday succeeded in freeing a massive container ship that had blocked the Suez canal for the past seven days, clogging up one of the world’s key trade arteries.

A fleet of tugboats and days of intensive dredging were given a helping hand by tides that swelled to their highest point with the full moon to free the 220,000-tonne Ever Given and haul it towards a lake between the north and south end of the canal, where the ship could undergo technical inspection, canal authorities said.

“Admiral Osama Rabie, head of the Suez Canal Authority (SCA), has announced the resumption of shipping traffic in the Suez canal,” the SCA said in a statement.

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After around 90 minutes trading, Wall Street is still trading lower.

The S&P 500 index is now down 0.75%, or 30 points, at 3,944 points - with ViacomCBS now down over 8% today.

Morgan Stanley is still in the red too, down around 3.6%, while Goldman Sachs is off 1.5%.

Other financial stocks are also weaker, with JP Morgan down 2.2%, as traders ponder the margin call blowout at Archegos -- and the implications for other market players.

Edward Moya of OANDA says Wall Street has started to look beyond life after COVID-19 and massive stimulus.

The Friday aftermath with Archegos Capital’s massive margin calls that led to the liquidation of over $20 billion in stocks won’t be immediate. With the S&P 500 index only down modestly, the damage appears to be contained.

But even if the Archegos margin call drama is a ‘one-off event’, it will have consequences, Moya points out:

Undoubtedly the over leveraging done by Archegos Capital Management, run by former Tiger Asia manager Bill Hwang, will force every prime brokerage to review their books. When you look at the stocks that were incorrectly bet on, Wall Street must ponder if the V-shaped stock market recovery got out of hand.

A US-based hedge fund defaulted on margin calls and while the reopening of the economy trade will continue, the path higher for US stocks will be complicated and filled with fresh risks. US stocks will likely finish the year much higher, but markets will remain on edge as hedge scrutiny will intensify.

Back to economics.... and factory output in Texas has surged this month, as manufacturers put last month’s winter storms behind them.

That’s according to the Dallas Fed’s latest manufacturing survey, which shows the sharpest rise in activity in at least 17 years, driven by a surge in new orders.

Here’s the details:

Texas factory activity expanded at a markedly faster pace in March, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, surged 28 points to 48.0, its highest reading in the survey’s 17-year history.

Other measures of manufacturing activity also pointed to sharply faster growth this month. The new orders index rose 18 points to 30.5, and the growth rate of orders index rose 11 points to 22.7. The capacity utilization index rocketed from 16.5 to 46.1, an all-time high. The shipments index rose 17 points to 33.1.

Perceptions of broader business conditions improved markedly in March. The general business activity index posted another double-digit increase, rising 12 points to 28.9. The company outlook index shot up 15 points to 25.8, its highest reading since mid-2018. The outlook uncertainty index edged down to 5.5.

Shares in ViacomCBS are down 6%, as the fallout from the hedge fund margin call reverberates.

That adds to the 27% slump on Friday, when Archegos Capital Management was reportedly forced to liquidate its position in the media company.

As this graph shows, ViacomCBS had surged over the last six months (helped by the leveraged positions taken out by Archegos!) before tumbling last week - as investors baulked at its decision to sell an extra $3bn of shares.

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Discovery, the other US media stock favoured by Archegos, are down around 4%.

US bank stocks have dipped in early trading, but the losses are modest.

Morgan Stanley has dropped by around 3%, while Goldman Sachs slipped by around 0.5%.

Both banks reportedly sold huge chunks of shares in businesses including ViacomCBS and Discovery, and Chinese stocks Baidu and Tencent Music on Friday, in the fire sale now linked to Archegos.

That’s a much smaller fall than Nomura (-16%) and Credit Suisse (-14%), of course.

As flagged earlier, Goldman have reportedly told shareholders and clients that any losses it faces from Archegos are likely to be immaterial, according to Bloomberg.

The FT explains that Nomura and Credit Suisse were among at least five banks that provided prime brokerage services to Archegos alongside Goldman Sachs, Morgan Stanley and UBS, according to people close to the matter, saying:

Other prime brokers that had provided leverage to Archegos said the problems at Nomura and Credit Suisse related to being slower in offloading share blocks into the market compared with their peers, notably Goldman Sachs and Morgan Stanley.

The New York stock market has opened pretty calmly.

Investors are weighing up the margin call drama at Archegos, and the good news that the Suez Canal has just been unblocked.

The main indices are in the red in early trading, but there’s really no signs of panic.

• Dow Jones industrial average: down 57 points or 0.17% at 33,015 points
• S&P 500: down 10 points or 0.25% at 3,964 points
• Nasdaq Composite: down 26 points or 0.2% at 13,112 points