Week ahead and the base effect skew
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.
Latest Market Insights
Outrageous Predictions 2023: The War Economy
- The constantly growing global need for energy drives the world's richest to huddle up and launch a R&D project in a size the world hasn't seen since the Manhattan Project gave the US the first atomic bomb.
French President Macron resignsThe political stalemate in France and the rise of Marie Le Pen following the 2022 elections corners President Macron, forcing him to give up on politics and resign from his position. At least for now.
Gold rockets to USD 3,000 as central banks fail on inflation mandateAs markets and central banks realise that the idea that inflation is transitory is wrong, and that prices will remain higher for longer, gold is sent through the roof, hitting a price tag of USD 3,000
EU Army forces EU down path to full unionWith continued challenges in the region and a US military that isn't aggressively enacting its former role as global policeman, the European Union agrees to create its own armed forces, bringing the whole region closer.
A country agrees to ban all meat production by 2030In an effort to become one of the global leaders on the path to net-zero emissions, one country decides to not only put a heavy tax on meat, but to ban domestic production entirely.
UK holds UnBrexit referendumFollowing a recession and domestic pressure, the United Kingdom is thrown into political turmoil that will end with a vote to wind back Brexit.
Widespread price controls are introduced to cap official inflationHistory tells us that with the war economy comes rationing and price controls. And this time is no different, as policymakers introduce strict price controls that lead to a range of unintended consequences.
OPEC+ & Chindia walk out of the IMF, agree to trade with new reserve assetSanctions against Russia have caused widespread turmoil due to US Dollar moves in countries across the globe that don't consider the US an ally. To relieve themselves from this, they leave the IMF and create a new reserve asset.
USDJPY fixed to the USD at 200 as Japan overhauls financial systemFollowing the challenges that faced the Japanese Yen in 2022, the Bank of Japan attempts to keep the currency from sliding. Unsuccessful on the long-term, Japan will launch a reset of its entire financial system.
Tax haven ban kills private equityWith the war economy comes an increased focus on national interests and sovereign nations' ability to assert themselves. In that regard, the OECD countries turn their attention on tax havens and pull the big guns out, banning them altogether.