Archegos Capital sends waves through European bank stocks, oil down as Ever Given is refloated

Morning Note

Bubbles everywhere are a sign of dysfunction and stress, but a fund blowing up is not itself a systemic risk, more of questionable internal risk management. A massive fire sale of some individual stocks last week had traders talking about who’d taken the hit as shares in ViacomCBS and Discovery plunged 27% on Friday alongside some big Chinese tech stocks. It looks certain the unwinding was caused by a massive margin call on Archegos Capital, the family fund run by Tiger ‘cub’ Bill Hwang.

The fallout has hit banks: Nomura shares fell 16% as it warned of a $2bn loss at its US unit, Credit Suisse said a ‘significant US-based hedge fund defaulted on margin calls’ last week and that this would have ‘highly significant and material’ impact on first quarter results. Shares fell 14% in early trade. European banks were offered this morning amid some uncertainty about who else might be on the hook for losses. UBS declined 4% and Deutsche Bank dropped 5%, with the Stoxx 600 bank sector down over 1%. Despite the stress this is causing among banking stocks, there is no sign of contagion in broader markets with the DAX hitting a fresh all-time high this morning. US indices leapt late on Friday afternoon, pushing the S&P 500 to a record closing high but with the quarter end and a holiday-shortened week we are expecting volatility. Also watch this week for more details about Joe Biden’s $3tn economic on Wednesday. Stock markets will be shut for Good Friday but the US nonfarm payrolls is still slated for release.

Chinese tech giants involved: As well as the tumble in the two US mass media stocks, reports indicate that Deutsche Bank, Goldman and Morgan Stanley forced Archegos to liquidate trades in a number of big China tech stocks on Friday. Archegos had built up a large stake in companies like Baidu and Farfetch, which had started to sell off in March. A new SEC rule aimed at Chinese stocks listed in the US, which requires firms to submit documents to establish that they are not owned or controlled by a governmental entity in a foreign jurisdiction, had exacerbated a decline in some big China tech names of late. This heaped more pressure on Archegos.

Systemic worries? I don’t think is systemically risky in itself – Archegos was massively levered and it appears to have been too concentrated in a number of risky stocks – but when we look at this and think about the GameStop saga and the decline in Tesla as two examples – what we’re seeing are more and more pockets of very unusual trading activity in some stocks. Shares in ViacomCBS and Discovery had been bid up to the rafters this year and came tumbling down, taking Archegos with them. ViacomCBS was up over 170% YTD and Discovery was +150% YTD before last week’s unravelling. The spark that led to the margin call seems to have been a massive $3bn stock offering by ViacomCBS which prompted selling last Tuesday and Wednesday. Archegos may have been trying to squeeze shorts in those US media names – according to Refinitiv short interest stands at 18% of Viacom and 28% of Discovery shares. Attempting a short squeeze alone is a risky game (should have gone to /wallstreetbets). At the other end, GSX Techdu, which has been under heavy activity short-seller attacks, finally broke down. The stock fell 40% on Friday on large block trade sales, possibly by Archegos as part of the fire sale.

You worry that this sort of frothy trading activity in turn creates pockets of distress among investors and banks that leads to larger unwinds and losses for financials. Leveraged family funds blowing up is nothing new though and I’d think that whatever impact this has on the banks, it will be a quarter or two of profit at worst. Excessive valuations in some names and sectors have created pockets of distress when things start to unravel. It’s a worry and a symptom of excess liquidity. And coming so soon after the Greensill fiasco, you have to wonder about what this says about Credit Suisse risk management if it can be saddled with such heavy losses from one fund. The Swiss financial watchdog Finma says it is aware of the hedge fund case and notes that several banks are involved.

So, this takes us nicely on the Deliveroo IPO (ROO), which is going to price towards the bottom of the indicated range amid some ‘volatile’ market conditions. Having aimed at pricing the IPO between £3.90 and £4.60 per share, implying a market cap of almost £9bn, it has today said it will price shares at between £3.90 and £4.10. It’s been a rocky process for Deliveroo as a number of big investors said they would not participate due to ESG concerns as well as a rich valuation and uncertain path to profitability. Despite this there is strong demand for the offering with deal well covered – the question is whether shares can deliver long term for investors or whether this is another DoorDash.

Apparel and retail names were under fire last week as Chinese consumers took issue with claims made about forced labour in Xinjiang. Nike fell more than 3% on Thursday (before rebounding over 3% on Friday) after a statement that resurfaced on Chinese social media suggested the company was worried about reports of forced labour. The undated statement said “We are concerned about reports of forced labor in, and connected to, the Xinjiang Uyghur Autonomous Region. Nike does not source products from the XUAR and we have confirmed with our contract suppliers that they are not using textiles or spun yarn from the region.”

A statement from H&M flagged last week said it was “deeply concerned by reports from civil society organizations and media that include accusations of forced labour and discrimination of ethnoreligious minorities in Xinjiang”. Meanwhile an Inditex webpage stating its concerns about reports alleging social and labour malpractice in various supply chains among ethnic Uighurs in Xinjiang was live on March 24, but subsequently taken down. Burberry’s plaid design was removed from the popular video game “Honor of Kings,” according to the game’s official Weibo account. A Hong Kong executive and legislative council member tweeted that she would no longer buy Burberry products. Wang Yibo, a popular actor, terminated his contract with Nike saying that he ‘firmly oppose[s] any act to smear China’. Fellow actor Tan Songyun also said she is terminating her contract with Nike. Burberry also got hit hard as Jefferies noted risks of a possible cancellation of the company’s partnership with Tencent Games. All this provides some interesting background ahead of H&M earnings this week (Mar 31st) for the first quarter, having already reported sales on March 15th. As well any commentary re China, we’ll be looking to see management’s view of how current trading is impacted by tighter coronavirus restrictions in Europe. Next (Apr 1st) is also reporting its full-year results to the end of January with the focus on the shift to online from the high street. We will also be looking for what management might have to say in terms of store footprints in light of the recent closures announced by peers.

And finally, I know some people will be rather disappointed the saga is over, but the 400m long Ever Given has been successfully refloated. Oil prices fell as the premium attached to crude from the blockage unwound. Oil traders can put the episode behind them now and focus on the OPEC+ meeting this week. WTI futures for May topped out around the 200-hour moving average at $61.40 and now wrestle with the 23.6% Fib level at the $60 round number. A break here calls for retest of the $57.40 lows last week with some tentative support around $59.

Oil futures dropped as the Suez blockage is solved.