Bank shares dropped on Monday after a fire sale of equities by a US investment group led to loss warnings from two big investment banks and left traders bracing for further repercussions.
Credit Suisse shares plunged almost 14 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 stock down 16 per cent in the biggest sell-off for the company on record.
This followed a $20bn fire sale on Friday triggered by Archegos, a private investment company founded by former hedge fund manager Bill Hwang.
Shares in top US banks underperformed, with Morgan Stanley closing 2.6 per cent lower and Citigroup dropping 2 per cent. European peer Deutsche Bank sank 3.3 per cent.
Matt Stucky, equities portfolio manager at Northwestern Mutual, said however that bank stocks were unlikely to see long-term damage from the Archegos fallout, despite “isolated volatility” in the sector Monday.
“The broader themes are still fully intact — that’s reopening, that’s reserve releases,” he said. “There’s a huge tailwind to the financials sector which is why things have accelerated so quickly there from summer 2020 . . . to where we are today, where there’s reason to be optimistic.”
ViacomCBS, in which Archegos had a large position, tumbled as much as 9 per cent in the morning, even after losing half of its market value last week. Discovery, another stock linked to Hwang’s fund, fell as much as 5 per cent. Both stocks later recovered slightly, with Viacom down nearly 7 per cent and Discovery nearly 2 per cent lower.
The morning moves pushed big US indices down at the beginning of the trading day, before they began clawing back losses. The blue-chip S&P 500 index slipped 0.1 per cent on the day, while the technology-focused Nasdaq Composite fell 0.6 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 haste with which banks reduced their exposure to Archegos “suggests Friday’s deleveraging may not be a one-off, but part of a developing pattern”, Holland said.
But others argued the fallout could have been worse and that the signs of contagion remained limited. “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, alluding to the enormous amount of fiscal stimulus filtering through the economy and the loose monetary policy being followed by the US Federal Reserve.
In Europe, the Stoxx 600 equity benchmark closed up 0.2 per cent and the UK’s FTSE 100 slipped 0.1 per cent.
Government bonds also dropped in price as ongoing concerns about US inflation weighed on appetite for the fixed-interest securities. The yield on the 10-year US Treasury, which moves inversely to its price, rose 0.03 percentage points to 1.7 per cent. Germany’s equivalent Bund yield rose 0.04 percentage points to minus 0.32 per cent.
The dollar, as measured against a basket of currencies, climbed 0.2 per cent to trade at around its highest level since late November, before retreating slightly.
Gold fell roughly 1 per cent on Monday to $1,711 a troy ounce, as traders anticipated a recovery in the US economy from President Joe Biden’s infrastructure spending package, which is due to be unveiled on Wednesday.
The precious metal has fallen 8 per cent this year due to a stronger dollar and rising US bond yields. Gold provides no yield, meaning it tends to suffer in a rising yield environment. A recovery in the global equity markets has also limited gold’s appeal.
Silver also fell nearly 2 per cent to $25 an ounce, while palladium was down almost 6 per cent at $2,535 an ounce.
Brent crude, the international oil benchmark, rose 0.7 per cent to $65 a barrel after the Ever Given, the container ship blocking the Suez Canal, was refloated.