What’s the deal with Archegos?

·        Bank shares tumbled overnight after Credit Suisse and Normura warned that they faced huge losses from a multi-billion dollar fire sale of stocks held by Archegos Capital Management, the investment company that manages the personal fortunes of former hedge fund mogul Bill Hwang. The investment firm had amassed huge positions in a clutch of companies including media giants like ViacomCBS and Discovery Inc as well as several other Chinese tech companies like Baidu and Tencent Music, largely using leverage. The decline in the prices of these stocks had prompted the firm’s lenders to demand cash to cover these souring bets.

·        When questions arose about the ability of the firm to cough out the necessary funds, the major investment banks began unwinding the firm’s positions. The forced selling of blocks of stocks triggered bigger drops in the prices of these shares, starting a vicious circle.

·        Due to the potential losses incurred, Credit Suisse stock plunged almost 14% while Nomura shares fell some 16%, the biggest sell-off for the company on record. Morgan Stanley closed 2.6% lower while Citigroup dropped 2%. Investment banks like Goldman Sachs, on the other hand, told investors that its potential losses are “immaterial,” having covered its exposure.

·        The Archegos drama triggered turbulence in early trading, pushing major market indices into the red. Yet, so far, the selling pressure hasn’t rippled beyond the specific stocks caught in the unwinding of Archegos’ positions. As the trading session wore on, the equity market found its footing and began clawing back losses.

·        The S&P 500 index slipped just 0.09% on the day, easing off record highs, with losses mostly concentrated in the energy, financials and information technology sectors. These sectors fell 1.26%, 0.93% and 0.51% respectively. The biggest winners of the night were utilities, consumer staples and communication services, which rose 1.07%, 1.03% and 1.02% respectively. The weakness in tech stocks also pushed the Nasdaq Composite Index into the red for the day. The tech-heavy index retreated 0.6%. Meanwhile, the Dow Jones Industrial Average continued its record run, rising 0.30% to 33,171.37, another all-time peak. Treasury yields rose above 1.7%, suggesting that the underlying pressure for high yields has not gone away.

By ocbc research