Monday Macros
Big QTR Reallocations...Massive Margin Call...Big Dealer Losses...Choppy Mkts
Our inbox has been filled over the weekend by increasing details of the trade that went down Friday morning and still lingers with the markets... And the massive losses hitting both Nomura and Credit Suisse... We saw big liquidations of equities Friday morning with a large late day swing ...we first thought ,given the time of day, that is was part of the reallocation trade from equities to bonds from some of the largest Sovereign wealth funds that needed to move money before quarter end... But as the day wore on we saw that GS had told their clients about a large liquidation of equities in both CBS Viacom, which was down 27% on the day and over 50% on the week... Discovery was another name...as was Baidu. Yesterday we were told it was part of the largest margin call ever that we can remember... A 20 billion margin call done by both Goldman and Morgan Stanley... The client was the Family office of Bill Hwang, who owns Archegos Capital... This had to do with a huge levered trade via derivatives on the names mentioned above and others... The other side of the Derivatives exposure was Nomura and Credit Suisse . This caused Nomura to pull a bond deal that they priced last week and was suppose to settle today... And this gives CS the title of the triple crown in the last few weeks... With major writedowns from Greensill, York Capital, and now Archegos Capital... Leverage can be an ugly trade and unfortunately it is not over...
Now to today and this week... Reallocation trades are not done yet... We still have three more days of an equity shortened week...we are seeing some weakness in equity futures and strength in bonds to start the week... Neither move is meaningful as we start the week... But one has to give credit for those that in the face of the big loss talked about above,did not stop equities from closing at records on Friday in the Dow and S+P...Overnight 10 years got to 1.63... We see resistance at 1.58 and potentially to 1.47... But however far treasuries get to by month end, we expect a reversal as April starts. European rates are steady while we still expect 25 billion of new issuance of corporates this week along with another dose of HY... The fact that demand for this space continues, even with some weakness in new issue pricing, tells us that April is still looking ok.. Spacs on the other hand are showing their age and are tired.. 19 of the 20 Spacs priced last week closed at or below 10 bucks.
Employment numbers... Equities should not lose money on Friday's employment report because the US equity market will be closed... So will most of Europe. The bond market will be open briefly with a noon close... The employment numbers could start to show some of the massive growth we expect this spring...Bank America is the highest estimate we have seen, over 1 million new jobs..expectations are closer to 635,000...but the economy continues to recover and new vaccinations in a 24 hour period in the US over the weekend was above 3.5 million...
We continue to believe that the Fed and the DC are in a bad place with what they are doing via the economy... We understand that they believe that there is no such thing as too much stimulus, as the Fed does not believe that inflation will come back to an accelerating trend... But we watched Larry Summers on WSW over the weekend... To summarize.....
1) Looking to remove the anchor of inflation expectations
2) Fed chair saying we are in a new regime
3) No longer sure that an overheating economy leads to inflation
4) New Administration espousing a new Progressive era where policy will change radically over from the last four decades...
and as we see the current environment
1) 3 trillion in recent stimulus
2) 2 trillion of savings overhang
3) Major acceleration of economy from Covid Overhang (3+ million of daily vac)
4) Fed mandating that rates will stay at zero for the next three years without flexibility to raise rates (so they say), even with a booming economy
5) Record growth this year
6) Accelerating Fed Balance Sheet Growth
7) And another 3 trillion of stimulus to be announced Wednesday
Now you get an idea of why we see rising long term rates over the spring... And why we are higher in 10 years by 75 basis over this first quarter of the year... Historically the 10 year has a positive real return... 1.70 GDP plus about 50 basis or real returns... So roughly 2.20... Which is why we continue to see the 1,95-2% of an objective of 10 years the next quarter... And based on above, we may be too conservative...
So now do you see why we think another choppy week is in store?
