The Archegos hedge fund in the United States was forced to sell a series of stocks after being surprised by too much debt after the stock plummet last week.
Archegos had made “leveraged” bets, that is, when traders use their capital to buy stocks and borrow money to buy more. If stocks rise, they make more money with their original capital, but if they fall too much, the lending broker may worry about their exposure and ask the investor to pay off some of the debt.
This demand is known as a margin call and may mean that traders have to sell other stocks to honor it.
Archegos had derivatives known as swaps which got into trouble when ViacomCBS shares fell last week. The losses that triggered margin calls that forced him to sell large chunks of stocks quickly, meaning the price of those he sold fell sharply. After trying to unwind the positions in an orderly fashion, the banks that lent him via the swaps gave up and started selling in the market, triggering steep declines.
Chaotic trading days now appear to be easing, giving hope for a rise in European markets today with the FTSE 100 called at 20.1 points to 6762.5.
CMC Markets said the Dax index in Germany is expected to rise from 70 to 14,887 and the CAC of 50 in France from 20 to 6,035.
Traders said the looming end of the month and quarter could lead to more volatility as traders try to square their positions before countdowns and performance metrics are taken.
CMC analyst David Madden said of the Archegos case: “You could argue that this type of event is quite healthy and a salutary reminder that despite the proven mantra of the past decade – that buying the dips is the only game in town – the market still has the ability to teach the unwary a very hard lesson if you take liberties with your risk management strategy. “
More explosions of this kind could occur due to unusually low interest rates pushing investors to adopt increasingly risky strategies to try and generate decent returns.
Banks, especially Credit Suisse, will have lost money but are much better capitalized today than they were during the last financial crisis, Madden pointed out, suggesting that economic recovery likely this year should allow them to earn enough money to counter Archegos’ blow. .
The bailout of the Ever Given freighter that blocked traffic on the Suez Canal for most of last week was likely to hit oil prices again today, with IG pulling it down 0.5% on its Brent Brent Index.
This could have an impact on BP and Shell and slow down part of the recovery of the oil-heavy FTSE 100.
Broker Numis reported extremely strong earnings in a trading release that could boost fellow brokers today. Numis said revenue for the first half of its fiscal year would reach £ 110million – up more than 75% from the same period a year ago and ‘comfortably ahead’ of the record performance of the second semester of last year.
Numis has been a big winner in the Covid emergency fundraisers that many companies have had to go through during the pandemic, but in the current semester it will even beat that performance as the market rally sparked a wave of IPOs that proved to be lucrative work for him.