Archegos hangover

The Archegos story continues sitting at the headlines of the financial news, as investors question whether the fall of the secretive hedge fund and its financial implications are done and dusted, or is it just the tip of the iceberg, that there are more players out there that have super leveraged positions, that could also go wrong and result in a similar fallout.  

If we start putting the pieces of the puzzle together, the GameStop saga and the short-squeeze frenzy, the Archegos capital fall, abnormal price rallies in cryptocurrencies and other obscure assets, there is a lesson to be taken. There is too much liquidity in the system, and separate occurrences are a clear sign that the financial markets are fuming, even though there is not an immediate systemic risk to the financial system right now. 

The biggest collateral damage of the Archegos story is on big banks led by Credit Suisse and Nomura which announced significant losses in the first quarter due to Archegos going bust. Nomura dived up to 20% and Credit Suisse plunged 14% on announcement of loss.  

The excess credit risk of the moment, mostly due to the excess liquidity available in the system is nothing new, still expect to see a but the Archegos could trigger some appetite loss in other banking stocks in the coming days, as other big banks are not spared from Archegos-like risks in the actual market environment. The latter could hurt the so-called reflation trade, where banks are among the top priority destinations of reflation traders along with other cyclical stocks, such as mining and energy.  

Yet, the financial markets tend to have a short memory on this type of crisis. And given the little impact on the global risk sentiment, the Archegos story will likely be forgotten by the end of the week. 

Overall, defensive names did better pulling the Dow index higher on Monday. Nasdaq slid 0.60% on the back of rising US yields, with the US 10-year yield advancing to 1.75% on the back of tensions that emerged from the Archegos incident and expectations of a new and huge fiscal spending from the Biden government under the form of multibillion dollar structure spending this time. Biden’s new spending package should add to the worries of seeing the US economy running hot, which in return, could oblige the Federal Reserve to tighten its policy earlier than otherwise.  

Else, Visa gained after unveiling its plans to allow for the settlement of transactions in USD Coin, which is a stablecoin backed one-to-one by the U.S. dollar. The idea is to offer an easy access to cryptocurrency platforms and wallets. This is great news for cryptocurrencies as their increasing inclusion within the traditional financial avenues is a sign that the crypto-sector can survive and thrive beyond the Bitcoin speculation. In this sense, we will certainly see Visa diverging positively from its financial peers hit by the Archegos hangover right now. 

On separate news, Tesla is under pressure this week. Despite announcing having secured an order of 10 semi-trucks and 2 megachargers, investors remain cautious regarding the ongoing investigations about the safety issues following an accident that involved Tesla and its cruise control yesterday. We know that Tesla has recently come under scrutiny in China for safety issues as well. Similar news in the US could further push investors to the exit. And as I mentioned yesterday, there is another risk for Tesla shares this week, the company could report lower car deliveries last quarter due to a global chip shortage, so the risks in Tesla remain tilted to the downside.

Volkswagen investors on the other hand could be rubbing their hands as Volkswagen is getting aggressive in its electrification process. According to a press release yesterday, that was a mistake by the way, Volkswagen could be even changing its name to Voltswagen in the US. Anyway, Volkswagen shares continue pushing higher on electrification efforts and could very well collect some Tesla outflows on its way to the top. But at the current levels, the stock price trades close to the overbought market region, and we could see minor downside corrections, which could be opportunities for those who are looking to jump on the back of a bull at a reasonable dip.  

Finally, giant Ever Given ship is finally freed, and the marine traffic is opened for business, which has been a huge sigh of relief for international trade, you can finally receive your last order on Aliexpress reasonably soon. US crude pushed to $62 per barrel as reaction, though the end of the Suez incident normally means a higher oil supply and could weigh on the price of a barrel moving forward, so the kneejerk positive reaction following the Ever Given event could not last long. However, we see a clear effort from oil bulls to push the price of a barrel higher. The OPEC+ decision could give a hand to the oil bulls, if we see no more than 1-1.5-million-barrel rise in group’s daily oil production from next month. 

Gold is preparing to test the $1700/1680 support on the back of rising US yields. It’s the same story, but a different day. Higher US yields increase the opportunity cost of holding the non-interest-bearing gold, especially at a time when there is so much liquidity and opportunities of higher returns elsewhere. Therefore, we could see gold bears being successful at their new attempt to clear the $1680 support.