What's going on with Archegos Capital?

Archegos Capital is the US investment fund that has drawn attention on Friday and continues to do so today. The fund is said to be liquidating and the process triggered some moves on the markets. As multi-billion dollar losses could be in play, there is a concern over spillover effects and impact on the broad market.

What happened?

Large block traders are said to have contributed to a strong sell-off on some US stocks last week. Bloomberg reported that Goldman Sachs, Morgan Stanley and Deutsche Bank were among banks that have sold shares worth billions of dollars through block trades. Among stocks involved were ViacomCBS (VIAC.US), Discovery (DISCA.US), Baidu (BIDU.US), Tencent Music (TME.US), Vipshop Holdings (VIPS.US), Farfetch (FTCH.US) or iQIYI Inc (IQ.US). Shares of all mentioned companies made significant losses last week and it looks like banks are liquidating positions linked to Archegos Capital, the US hedge fund, who has defaulted on margin calls.

High leverage has already been a topic of hot debate as margin debt as share of GDP sits at record levels. Situations like this and potential consequences highlight the need for regulatory debate whether there is a need to impose more strict limits on leverage. Source: XTB

Overleveraged triggers wave of selling

It is known that Archegos Capital was a significantly leveraged fund but as it made big bets via derivatives, the size of its positions remains unclear. Archegos used swaps and CFD contracts provided by Nomura and Credit Suisse to take positions on US stocks and because of that it did not have to disclose whether its position on any particular stock had exceeded the 5% reporting threshold. Around $20 billion in block trade potentially linked to Archegos were identified last week but it is rumored that the fund's total position may be as high as $50 billion. Nomura dropped over 16% today after saying that losses at its prime brokerage unit may be as high as $2 billion. Credit Suisse (CSGN.CH) traders over 12% lower after saying that negative impact on Q1 2021 earnings may be material.

Credit Suisse (CSGN.CH) is one of the banks said to have incurred big losses on derivatives trading with Archegos. Bank's executives said that it is to early to assess size of losses but that they may have a material impact on Q1 2021 earnings. Stock is trading over 12% lower today and drops below the lower limit of the Overbalance structure. Support zone at 10.70 CHF is being tested at press time. Source: xStation5

Broad market concerns

It is believed that Archegos has built massive positions on the US and Chinese media stocks so there is a risk of broader spillover effects. As the hedge fund defaulted on margin calls, banks need to exit positions and absorb any related losses. Apart from that, if there is more selling to come, deep share price declines may force other funds to close positions on other stocks in order to cover losses. This may trigger a broad market sell-off. However, as US futures trade around 0.5% lower today, it looks like that large sell-off may be avoided. Investors should track performance of the aforementioned media stocks in order to try to judge whether exiting from Archegos' positions has already ended or not.

So far there were no major spillover effects on the broader market resulting from liquidation of Archegos Capital's positions. US100 traded sideways and managed to gain on Friday, when selling of stocks linked to Archegos was the heaviest. Nevertheless, index may get under pressure in case positions turn out to be larger than expected and selling continues. Near-term support for US100 can be found in the 12,760 pts area (marked by 50% retracement of recent upward move) while near-term resistance can be found at 13,300 pts (61.8% retracement of late-February correction). Source: xStation5