Week ahead and the base effect skew

Equities 4 minutes to read
Eleanor Creagh

Australian Market Strategist

Summary:  A look at the Archegos Capital blow up, contagion risk and what's on the radar for the week ahead.


US futures are off to a shaky start in Asia’s Monday trade after a risk-on Friday session with a solid ramp up into the close, however regional bourses are faring better. The story dominating sentiment is the Hwang family office blow up on highly levered positions, and associated margin calls, block trades and prime brokerages losses. Bill Hwang’s Archegos Capital is at the epicentre of the story triggering the losses, but another Tiger Cub at Teng Yue Partners is also said to be involved with losses on GSX, one of the frontline stocks in Friday’s liquidation route.

From a regulatory perspective, this event and the significant losses from various prime brokerages is likely to see a heightened scrutiny around the disclosures of derivative instruments like swaps that allow hedge funds to dodge disclosures and anonymously amass billions in notional equity exposure, in some cases amassing significant percentages of the free float under the radar, as well as avoiding regulatory limits on leverage via off balance sheet swapped margin.

However, from market perspective with contagion looking limited as Asian indices hold up despite the news flow of further forced liquidations and prime brokerage losses, this looks at this stage to be a positioning driven sell off in US futures and various single stock names. Although there is still the risk of further forced deleveraging if prime brokers were to tighten margin requirements. On top of what is a shortened holiday trading week with liquidity potentially impacted alongside the month end, quarter end rebalancing flows and associated noise that the close of month/quarter brings.

Aside from the hedge fund blow up and associated contagion risk front and centre this week is a raft of data ready to kick off the “base effect cliff” into the heart of the crisis last year. These incredibly favourable base effects will render a huge year over year acceleration in the data due March, April, May. A big rate of change acceleration in both growth and inflation data with long dated US yields likely headed higher – not time to ditch reflation trades. PMI surveys and the US ISM manufacturing data this week are set to give a read on supply chain dislocations, rebounding demand and the already present inflation pressures visible across global manufacturing. All eyes will be on the ISM prices paid read, with last months survey’s measure of prices paid by manufacturers jumping to a reading of 86.0, the highest since July 2008. US 10yr yields set to respond in kind to price pressures that are clearly building. Also, on the radar here President Biden’s infrastructure stimulus package set to be debuted in part on Wednesday – the fiscal spigots in full flow putting additional pressure on US yields.

The bond market is responding to these repeated inflationary reads, and will continue to do so, with the 10yr yield continuing to breakout hitting new cycle highs and yield curves steepening. The OPEC+ decision will also be a driver here with oil sliding again after the Ever Green was refloated in the Suez.

Lastly, Friday sees the US jobs data which should show the US economic recovery kicking into gear with the labour market recovery stepping up. The recovering labour market providing a consumption tailwind for already fiscally juiced up, pandemic fatigued consumers ready to spend and deploy savings, colliding with supply chain dislocations and Covid impacted base effects. A true reflationary cocktail.

 

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Saxo Bank A/S (Headquarters)
Philip Heymans Alle 15
2900
Hellerup
Denmark

Contact Saxo

Select region

International
International

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

This website can be accessed worldwide however the information on the website is related to Saxo Bank A/S and is not specific to any entity of Saxo Bank Group. All clients will directly engage with Saxo Bank A/S and all client agreements will be entered into with Saxo Bank A/S and thus governed by Danish Law.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.