Week ahead and the base effect skew
Australian Market Strategist, Saxo
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.