Week ahead and the base effect skew

Week ahead and the base effect skew

Equities 4 minutes to read

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.

 

Quarterly Outlook

01 /

  • Equity outlook: The high cost of global fragmentation for US portfolios

    Quarterly Outlook

    Equity outlook: The high cost of global fragmentation for US portfolios

    Charu Chanana

    Chief Investment Strategist

  • Commodity Outlook: Commodities rally despite global uncertainty

    Quarterly Outlook

    Commodity Outlook: Commodities rally despite global uncertainty

    Ole Hansen

    Head of Commodity Strategy

  • Upending the global order at blinding speed

    Quarterly Outlook

    Upending the global order at blinding speed

    John J. Hardy

    Global Head of Macro Strategy

    We are witnessing a once-in-a-lifetime shredding of the global order. As the new order takes shape, ...
  • Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Quarterly Outlook

    Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Jacob Falkencrone

    Global Head of Investment Strategy

  • Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    Quarterly Outlook

    Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    John J. Hardy

    Global Head of Macro Strategy

  • Equity Outlook: The ride just got rougher

    Quarterly Outlook

    Equity Outlook: The ride just got rougher

    Charu Chanana

    Chief Investment Strategist

  • China Outlook: The choice between retaliation or de-escalation

    Quarterly Outlook

    China Outlook: The choice between retaliation or de-escalation

    Charu Chanana

    Chief Investment Strategist

  • Commodity Outlook: A bumpy road ahead calls for diversification

    Quarterly Outlook

    Commodity Outlook: A bumpy road ahead calls for diversification

    Ole Hansen

    Head of Commodity Strategy

  • FX outlook: Tariffs drive USD strength, until...?

    Quarterly Outlook

    FX outlook: Tariffs drive USD strength, until...?

    John J. Hardy

    Global Head of Macro Strategy

  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

None of the information provided on this website constitutes an offer, solicitation, or endorsement to buy or sell any financial instrument, nor is it financial, investment, or trading advice. Saxo Capital Markets UK Ltd. (Saxo) and the Saxo Bank Group provides execution-only services, with all trades and investments based on self-directed decisions. Analysis, research, and educational content is for informational purposes only and should not be considered advice nor a recommendation. Access and use of this website is subject to: (i) the Terms of Use; (ii) the full Disclaimer; (iii) the Risk Warning; and (iv) any other notice or terms applying to Saxo’s news and research.

Saxo’s content may reflect the personal views of the author, which are subject to change without notice. Mentions of specific financial products are for illustrative purposes only and may serve to clarify financial literacy topics. Content classified as investment research is marketing material and does not meet legal requirements for independent research.

Before making any investment decisions, you should assess your own financial situation, needs, and objectives, and consider seeking independent professional advice. Saxo does not guarantee the accuracy or completeness of any information provided and assumes no liability for any errors, omissions, losses, or damages resulting from the use of this information.

Please refer to our full disclaimer for more details.

Saxo
40 Bank Street, 26th floor
E14 5DA
London
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. 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
Additional Key Information Documents are available in our trading platform.

Saxo is a registered Trading Name of Saxo Capital Markets UK Ltd (‘Saxo’). Saxo is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.

©   since 1992