A senior regulator has warned that the financial system must be protected from hedge funds making high-risk bets, after a crisis at a US investment firm saddled two major banks with massive losses.
Alex Brazier, the Bank of England’s executive director for financial stability strategy and risk, said that “guardrails” may be needed to prevent the actions of a few traders from contaminating the wider market.
He spoke out after global banks Credit Suisse and Nomura were hammered by a $20bn (£15bn) fire sale sparked by hedge fund tycoon Bill Hwang’s family office, Archegos.
Credit Suisse said the impact could be “highly significant and material to our first quarter results” and Nomura is bracing for a $2bn blow.
Mr Brazier said officials at Threadneedle Street are closely monitoring the Archegos situation.
Speaking at an event hosted by Reuters, he said: “You never want regulations to protect investors like this from themselves - they are deliberately taking risk, and they should bear the consequences of that.
“What we need to investigate is whether there’s a case for guardrails to avoid… collateral damage on the wider economy as these sorts of positions are unwound.”
Archegos was forced to sell billions of dollars of shares to raise cash so it could cover losses from market bets that went wrong.
The sale at the end of last week contributed to a market rout that wiped more than $35bn off a string of major global stocks. It raised fears that so-called family offices such as Mr Hwang’s are operating with little oversight and have dangerous ties to the wider banking system. Family offices manage the wealth of just a few ultra-rich individuals and are not held to the same strict rules as firms which look after money on behalf of larger groups.
Among veteran traders, the saga invoked memories of the 1998 collapse of Long Term Capital Management which nearly brought Wall Street down with it.
Patrick Ghali, managing partner at investment adviser Sussex Partners, said: “A bank shouldn’t lose a quarter worth of profitability due to one client - seems like too much concentration risk for the banks.
“[This] also raises questions about risk management at the family office. I suspect the reason banks got involved was simply due to the amount of commission they generated.”
Mr Brazier, who is stepping down from his role at the Bank this week, said the need for tougher regulation of non-bank investors was also demonstrated by an unprecedented cash crunch last March when markets almost ground to a halt after Covid hit.
He warned: “We’ve been reminded, if it were needed, that the non-bank system and the banking system are not too hermetically sealed separate things. What happens in one affects the other.”
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05:20 PM
Wrapping up
That is all from us today. As I leave you, the Archegos saga is still rippling across US markets. Shares of lenders Nomura and Credit Suisse continue to be hammered, down 13.5pc and 11.2pc respectively.
Thanks for following along - Simon will be back with you in the morning.
04:37 PM
J&J to deliver shots to Europe from April 19
New York-listed pharmaceutical giant Johnson & Johnson had said it will start delivering its single-shot coronavirus vaccine to Europe on April 19.
Its jab was approved by European regulators in mid-March, following those made by Pfizer-BioNTech, Moderna and AstraZeneca. Its imminent roll out will help speed up the Continent's vaccination drive.
Private firms to import vaccines into the Philippines
In a slight deviation, private companies will now be allowed to import vaccines "at will" in the Philippines, to boost inoculations amid a global supply crunch and speed up the reopening of the economy.
Bloomberg has the details:
Businesses can choose where to source and import vaccines, president Rodrigo Duterte said. Private companies were previously required to enter a deal with the government and the vaccine manufacturer to secure supplies.
“Business people can give these vaccines to their employees, so that the economy will be opened,” Duterte said at a televised briefing.
The Philippines’ vaccination campaign is lagging behind its Southeast Asian neighbors as it faces a new surge in infections and an economic recession that’s seen persisting into this quarter.
The government will give 1,000 pesos (£15) each to 22.9m individuals affected by the one-week lockdown of the capital and nearby areas that started Monday, Budget Secretary Wendel Avisado said at the same briefing.
03:40 PM
Wall Street tracks lower on Archegos saga
Bill Hwang
Wall Street is remaining in the red, having hit highs on Friday, weighed down by the Archegos saga.
Just before midday, the benchmark S&P 500 is down by almost 0.5pc, the Dow Jones by 0.3pc and the Nasdaq by nearly 1pc.
“Rumours continue to swirl about exactly which companies have been caught up in the Archegos saga and how badly. So far, it’s the investment banking sector bearing the brunt with Morgan Stanley and Goldman Sachs both trading down," said Danni Hewson, financial analyst at AJ Bell.
“There are already questions being asked about why so called ‘family offices’ are exempt from much of the scrutiny enjoyed by hedge funds and calls for the system to be tightened. With the numbers quoted today suggesting as much as $6tn is currently under the management of such firms, there is the expectation change must come quickly.”
Commenting on the Archegos saga, Rick Meckler, a partner at New York-based Cherry Lane Investments, a family investment office, says:
It's reflective of some of the excesses the market has seen over the last month with wild gyrations in some specific stocks without much explanation. This certainly explains the trading in VIAB and Discover and some of the Chinese issues. It's a black eye for the industry because it suggests that the problems that they had over 10 years ago now, there still may not be a full handle on risk control when it comes to leveraged trading.
It's effect on the broad market is probably pretty limited. It doesn't change much about the economy or it doesn't impact a vast majority of U.S. stocks. Initial reaction when I got the news this morning – the market was down but since it has recovered about half of that. My guess is that the financial sector will take a hit today but the impact on broader markets is going to be small.
02:21 PM
Murdoch's swoop for US publishing rival earns him rights to Orwell and Tolkien titles
Lord of the Rings
Rupert Murdoch’s publishing empire will own high-profile novels from George Orwell and J.R.R. Tolkien after it made a swoop for a US rival in a $349m (£252.2m) deal.
My colleague Laura Onita reports:
News Corp’s bid for part of Boston-based Houghton Mifflin Harcourt will see the titles, including The Lord of the Rings trilogy, Animal Farm and 1984, folded into HarperCollins, one of its subsidiaries.
HarperCollins currently has rights to Tolkien’s works in the British Commonwealth.
The move is the latest consolidation in the sector and it follows a failed attempt by News Corp to buy Simon & Schuster last year.
The publisher was subsequently bought by Penguin Random House from ViacomCBS for £2.18bn. It is currently undergoing scrutiny from the competition watchdog in the UK.
HMK’s books and media arm posted sales of $191.7m and adjusted underlying profits of $26.6m last year.
01:48 PM
ViacomCBS and Discovery steady after record plunge
After record one-day declines on Friday, shares in media companies ViacomCBS and Discovery largely steadied in early trading on Monday. ViacomCBS fell 3pc while Discovery rose 0.3pc.
Here's a chart detailing last week's wild ride:
ViacomCBS and Discovery shares plunge under heavy selling pressure
01:38 PM
Wall Street falls at the open
US stocks start the week in negative territory as traders weigh the level of contagion from forced block trades through financial markets.
US market data - Bloomberg
Investment banks have taken the biggest hit as Goldman Sachs and Morgan Stanley, the two banks involved in last week's block trades, pull their peers lower.
US bank data - Bloomberg
01:19 PM
'Family offices' manage more than $6tn globally
Bill Hwang's fund is one of as many as 10,000 "family offices" that manage $6tn (£4.3tn) in assets. But unlike standard hedge funds, they are exempt from most regulatory disclosure requirements.
Watch this clip from CNBC for more:
There are now 5,000-10,000 family offices around the world managing more than $6T in assets.@robtfrank reports on the SEC exemptions for these firms: pic.twitter.com/gj0U0wvuK6
Another institutional investor shuns Deliveroo IPO
Deliveroo
EdenTree, a UK equity fund that focuses on sustainable investments, is the latest institutional investor to pass up the Deliveroo float this week.
Ketan Patel, a fund manager at EdenTree, says:
EdenTree will not be investing in a business model which has little to commend for ESG investors, where the relationship between capital and labour is so asymmetrical. The rise of the S in ESG during the pandemic has highlighted social inequity and injustice within society. The Deliveroo business model is best characterised as a race to the bottom with employees in the main treated as disposable assets which is the very antithesis of a sustainable business model.
For those investors who argue that only change can be brought by investing and engaging with management, we would urge caution as this approach has yielded little or no progress in businesses that are built around exploitative practices. To amend or remove these practices will leave a highly unprofitable business model and one that will not appeal to any investor. From an investment perspective, the threat of regulatory change remains the biggest issue for long-term investors and Uber is a real example of how fast the regulatory landscape can change, rendering the business model null and void.
12:45 PM
Suez Canal fiasco helps shipping giants cash in
Operators of container ships such as the vessel that is blocking the Suez Canal are set to make more money in the first three months of 2021 than the whole of last year.
My colleague Oliver Gill reports:
Analysts say the disruption caused by the stricken Ever Given, which has blocked one of the world’s busiest trading routes for almost a week, will delay an expected fall in freight rates.
Shipping prices are close to an all-time high after Covid sparked a surge in demand. Rates are currently 189pc higher than last year.
David Kerstens, an analyst at stock broker Jefferies said: “The current blockage of the Suez Canal will likely lead to capacity constraints and higher freight rates, as journeys are increasingly being re-routed around the Cape of Good Hope, adding at least 7-10 days to journeys.
“The container liners are expected to earn more in [the first quarter of 2021] than in all of 2020. We expect record-high freight rates will normalise, but this might be delayed by the current blockage of the Suez Canal.”
At the start of the coronavirus pandemic many shipping companies laid off staff and parked vessels in ports. Demand for products from the Far East, driven by a surge in spending online and a scramble to secure PPE, meant freight rates rose sharply after a number of years in the doldrums.
Suez blockage's blow to trade
12:21 PM
How leveraged bets work
New York Stock Exchange - Nicole Pereira
Like many stock market stories, the unfolding Archegos saga involves some complex trades and financial instruments, namely leveraged bets and margin calls.
My colleague Sam Benstead breaks down what these terms mean below:
What is a leveraged bet and a margin call? Archegos
11:49 AM
Leveraged bets
Bill Hwang's Archegos hedge fund built up its positions via leverage, using swaps or so-called contracts-for-difference, it has been reported. It means Archegos may never actually have owned most of the underlying securities - if any at all, Bloomberg notes.
While investors who build a stake of more than 5pc in an US-listed company usually have to disclose their position and future transactions, that’s not the case with stakes built through the type of derivatives apparently used by Archegos.
Hwang appears to have been caught out by a margin call, which occurs when the market goes against a large, leveraged position, forcing the hedge fund to deposit more cash or securities with its broker to cover any losses.
Archegos was probably required to deposit only a small percentage of the total value of trades - leaving headache for the banks backing him.
Check out the chart below to see how badly the sell-off affected Viacom CBS and Discovery: Archegos reportedly held positions in both companies, alongside others such as Chinese giants Baidu and Tencent.
11:44 AM
US futures marginally down
wall st
US futures are down this afternoon amid the hedge fund sell-off crisis gripping Wall Street.
The S&P 500 is expected to open 0.3pc lower at 3,953.5 points, while the Dow is set to lose a similar percentage, though the tech-heavy Nasdaq looks due to open largely flat from Friday's close.
The Dow and the S&P 500 are still less than 1pc off their record peaks, while the Nasdaq is around 7pc from its February all-time high.
But shares in Bank of America, Citigroup, JPMorgan Chase, Goldman Sachs, Wells Fargo and Morgan Stanley all dropped between 0.8pc and 3.3pc in pre-market trading.
“This incident reminded markets of the dark side of leverage, likely leading some players to cut their risk exposure near record highs to avoid any serious losses if the selling snowballs,” Marios Hadjikyriacos, investment analyst at online broker XM in Cyprus, told Reuters.
11:06 AM
Households' consumer credit repayments at strongest rate since 1994
Moving away from hedge funds for a moment. Newly released Bank of England figures show households made net repayments on products such as credit cards, personal loans and overdrafts at the strongest annual rate in 27 years in February.
My colleague Tim Wallace has the details:
Mortgage lending hit a five-year high last month as eager buyers borrowed a net £6.2bn in the frenzy to move before the now-extended stamp duty holiday comes to an end.
A total of 87,700 mortgages were approved for home purchases in February, the Bank of England said, down from more than 100,000 in November and December, but still one of the highest numbers since 2007, before the financial crisis struck.
Homebuyers have not borrowed this much since March 2016, when the market was also distorted by stamp duty changes. In that instance, buyers and investors were rushing into the market before the 3pc second home surcharge came into force, pushing up costs for landlords.
Archegos Capital, the family office of trader Bill Hwang, was behind the unprecedented share selling on Wall Street last Friday after the fund defaulted on margin calls.
This meant he was forced by his bankers to sell more than $20bn worth of shares after some trades turned sour and the lenders exercised their right to liquidate his positions to recover their money.
Hwang's Tiger Asia Management produced stellar returns in its early years before Hwang plead guilty to insider trading in 2012. He agreed to criminal and civil settlements of more than $60m, and later closed down the fund.
Following the settlements, he set up Archegos, a family office which concentrated on managing money for wealthy families.
Bloomberg reported that Archegos had used derivatives contracts with brokers – known as swaps – to gain substantial additional leverage. That meant that the firm didn’t have to disclose its holdings in regulatory filings, since the positions were on the banks’ balance sheets.
10:15 AM
Swiss watchdog says several banks involved in hedge fund case
Swiss financial watchdog FINMA said on Monday it has been informed by Credit Suisse about its involvement in an international hedge-fund case involving several banks.
"FINMA is aware of this international hedge-fund-case, (several banks and locations internationally are involved)," the authority said. "FINMA was informed by the bank and is in contact with it."
Here is the damage done so far this morning to some of the world's largest investment banks:
As of a few mins ago
Nomura -16% Credit Suisse -14% Deutsche Bank -5% UBS -4% Goldman -3% (premarket) Morgan Stanley -3% (premarket)https://t.co/fDlrP1LhEg
Traders are preparing for one of the most eagerly anticipated opens for US stocks in months.
Cambridge University's Mohamed El-Erian says "what happens next depends on remaining sales and related contagion channels". Buckle up.
The #Archegos drama involves a classic mix of massive leverage, concentrated positions, derivative overlays, forced deleveraging and distressed sales Pain has been felt so far only in a handful of stocks. What happens next depends on remaining sales and related contagion channels pic.twitter.com/aErUVylki7
The third wave of Covid infections striking Europe will postpone the region’s rebound as it struggles to keep pace with recoveries elsewhere, leading economists have warned.
My colleague Tom Rees reports:
Eurozone GDP will fall again in the first quarter of 2021, plunging the region into a double dip recession, predicted a quarterly report from the German Ifo Institute, the KOF Swiss Economic Institute, and the Italian Istat Institute.
Output is expected to slip 0.4pc in the first three months of the year before vaccine rollouts and the EU’s €750bn Recovery Fund kickstart the recovery. GDP is set to jump 1.5pc in the second quarter with growth accelerating to 2.2pc in the third quarter.
“The outlook is subject to high uncertainty, determined by the resurgence of contagions in many European countries,” the economists said.
“On the one hand, the start of the vaccination campaigns gives some reason for optimism. On the other hand, from the beginning of March onwards the pandemic situation has started to worsen almost everywhere.”
09:25 AM
Suez canal to reopen today
The Suez canal is expected to reopen today with the stuck container ship set to be fully refloated within five hours, according to reports.
SUEZ CANAL OPERATIONS IS SAID TO RESUME TODAY , SHIP TO BE FULLY FLOATED IN 5 HOURS#BREAKING
After a positive start, the FTSE 100 has turned sharply to the downside as traders brace for the potential fallout from a wave of forced selling associated with Archegos.
European market data - Bloomberg
08:44 AM
'A fund blowing up is not itself a systemic risk'
Bill Hwang
Commenting on the Archegos fallout, Neil Wilson, chief market analyst at Markets.com, says:
Bubbles everywhere are a sign of dysfunction and stress, but a fund blowing up is not itself a systemic risk, more of questionable internal risk management. A massive fire sale of some individual stocks last week had traders talking about who’d taken the hit as shares in ViacomCBS and Discovery plunged 27pc on Friday alongside some big Chinese tech stocks. It looks certain the unwinding was caused by a massive margin call on Archegos Capital, the family fund run by Tiger ‘cub’ Bill Hwang.
The fallout has hit banks: Nomura shares fell 16pc as it warned of a $2bn loss at its US unit, Credit Suisse said a ‘significant US-based hedge fund defaulted on margin calls’ last week and that this would have ‘highly significant and material’ impact on first quarter results. Shares fell 14pc in early trade. European banks were offered this morning amid some uncertainty about who else might be on the hook for losses.
UBS declined 4pc and Deutsche Bank dropped 5pc, with the Stoxx 600 bank sector down over 1pc. Despite the stress this is causing among banking stocks, there is no sign of contagion in broader markets with the DAX hitting a fresh all-time high this morning. US indices leapt late on Friday afternoon, pushing the S&P 500 to a record closing high but with the quarter end and a holiday-shortened week we are expecting volatility. Also watch this week for more details about Joe Biden’s $3tn economic on Wednesday. Stock markets will be shut for Good Friday but the US nonfarm payrolls is still slated for release.
08:19 AM
EY drops appeal in Dubai whistleblowing case
EY
UK accounting firm EY has dropped its appeal against a High Court case in which a former partner was awarded $10.8m in compensation after blowing the whistle on an audit scandal.
The case concerned allegations that EY had covered up the adverse findings of a sustainability audit into the Dubai Gold trade, including evidence of money laundering and conflict minerals, causing the partner in charge of the audit, Mr Rihan, to resign.
After a trial, Mr Justice Kerr ruled in April 2020 in favour of Mr Rihan and found that senior EY Global executives had consistently acted in breach of the relevant professional and ethical standards when dealing with Mr Rihan’s concerns,
The move by the global accountancy firm means that Mr Rihan will receive $10.8m (subject to adjustment for tax) in damages awarded when he won his case against his former employer in April, 2020.
07:54 AM
DMGT jumps 10pc on Cazoo float
Shares in Daily Mail and General Trust have jumped by more than a tenth after online car dealer Cazoo announced it has secured a $7bn (£5bn) valuation in a US listing.
The deal with an $800m Special Purpose Acquisition Company will deliver a $1.35bn windfall for the Daily Mail owner, which is a significant shareholder in Cazoo. The group originally invested about £117m in Cazoo.
The oil price has fallen slightly this morning after the container ship stuck in the Suez Canal was refloated, and its position moved about 80pc.
Brent crude fell 0.8pc to $63.85. Here is a video of the ship in motion.
07:23 AM
Credit Suisse slides 10pc
Credit Suisse
The biggest story in markets today will centre around huge block trades that occurred in the US on Friday.
Credit Suisse tumbled 10pc at the open after it warned it may face a "significant loss" in the first quarter related to the bank exiting positions related to a hedge fund client.
The Swiss bank did not name the hedge fund in question, but reports suggest that it is Archegos Capital Management, a multibillion-dollar family office run by New York hedge fund tycoon Bill Hwang.
The Swiss bank said that while it is too early to quantify the exact size of the loss, "it could be highly significant and material to our first quarter results".
Overnight, Nomura also warned of a “significant” potential loss from an unnamed US client, again thought to be Archegos Capital Management.
07:12 AM
FTSE higher as UK economy slowly reopens
London's blue-chip index has started the week slightly higher as the UK economy begins to reopen.
All eyes will be on the US open later on, however, following revelations that Archegos – the family office of Bill Hwang – was behind a spree of block trades, selling Chinese tech giants and US media companies on Friday.
European market data - Bloomberg
06:56 AM
Entain knocked back in bid for Australian gambling firm
Australian gambling company Tabcorp has rejected multi-billion offers for its wagering and media division, after UK-based Entain said it was among those looking to acquire the business.
FTSE 100 company Entain, which runs Bwin, Coral, Ladbrokes, PartyPoker, and Sportingbet, said in February that it was in "early stage" discussions with Tabcorp Holdings.
The company said: "This would present an opportunity to acquire an attractive business which, if combined with Entain's existing Australian business, would create a leading, integrated multi-channel and multi-brand wagering company."
Tabcorp, in an announcement to the Australian Stock Exchange, valued its wagering and media business at A$3bn, or £1.66bn, and said the proposals fell short of expectations
06:51 AM
'Significant demand'
Here's a Deliveroo spokesman explaining the pricing of the float, which is expected to value the company at between £7.6bn and £7.85bn:
Deliveroo has received very significant demand from institutions across the globe.
The deal is covered multiple times throughout the range, led by three highly respected anchor investors.
Given volatile global market conditions for IPOs, Deliveroo is choosing to price responsibly within the initial range and at an entry point that maximises long-term value for our new institutional and retail investors.
06:44 AM
Deliveroo trims price range ahead of mega-float
Good morning. Deliveroo has said it will price shares for its highly anticipated stock market listing towards the bottom of its price range due to "volatile" market conditions.
The takeaway delivery service is set to announce its final pricing on Wednesday morning but has narrowed its share price range to between £3.90 and £4.10 per share.
5 things to start your day
1) Independence risks economic havoc for Scots: May’s Holyrood elections could trigger a major push for a second independence referendum, just seven years after “once in a generation” plebiscite.
2) ITV teams up with venture capital as it battles the streaming giants:Boss Carolyn McCall is betting on a sharp revival in the advertising market as Britain’s world-leading vaccine rollout takes effect - and relying on hits such as reality show Love Island to tap into post-pandemic optimism.
3) British firm cracks electric car motor conundrum:A British company which has developed pioneering electric car motors that do not rely on expensive rare magnets is preparing to raise £250m as it seeks to expand.
Asian stocks rose on Monday after Wall Street hit a new high and investors were encouraged by government stimulus and the rollout of coronavirus vaccines.
Shanghai, Tokyo, Hong Kong and Seoul advanced.
The Shanghai Composite Index rose 0.7pc to 3,443.55 and the Nikkei 225 in Tokyo advanced 1.1pc to 29,484.57. The Hang Seng in Hong Kong added 0.3pc to 28,437.46.
The Kospi in Seoul was up less than 0.1pc at 3,043.55 while Sydney's S&P-ASX 200 shed 0.2pc to 6,808.20. New Zealand and Southeast Asian markets advanced.
Coming up today
Corporate: Ten Entertainment (Full year)
Economics: Mortgage approvals and lending, consumer credit (UK)
Affluent Americans may want to double-check how much of their bank deposits are protected by government-backed insurance. The rules governing trust accounts just changed.
Former NBA guard Darius Morris has died at the age of 33. He played for five teams during his four NBA seasons. Morris played college basketball at Michigan.
Jason Fitz and Frank Schwab join forces to recap the draft in the best way they know how: letter grades! Fitz and Frank discuss all 32 teams division by division as they give a snapshot of how fans should be feeling heading into the 2024 season. The duo have key debates on the Dallas Cowboys, New York Giants, New Orleans Saints, Los Angeles Rams, New England Patriots, Las Vegas Raiders and more.
Ohtani tagged Braves ace Max Fried for a two-run shot in the first inning then hit a solo shot in the eighth as the Dodgers prevailed in a battle of NL favorites.
