U.S. markets and stock exchange traded funds pared early morning losses by mid-Monday after banks warned they could incur heavy losses in response to a hedge fund’s default on margin calls.
On Monday, the Invesco QQQ Trust (NASDAQ: QQQ) was up 0.2%, SPDR Dow Jones Industrial Average ETF (NYSEArca: DIA) rose 0.3%, and iShares Core S&P 500 ETF (NYSEArca: IVV) was 0.1% higher.
Weighing on risk sentiment on Monday, Nomura and Credit Suisse warned of significant losses after U.S. hedge fund Archegos Capital defaulted, Reuters reports.
“It’s a black eye for the financial industry because it suggests that there still may not be a full handle on risk control when it comes to leveraged trading,” Rick Meckler, a partner at Cherry Lane Investments, told Reuters. “This seems like a pretty specific case. It could lead to increased regulation … but the impact on broader markets is going to be small.”
Luc Filip, head of investments at SYZ Private Banking, argued that any contagion effect may be limited and volatility in markets could be fleeting, the Wall Street Journal reports.
The bad bets raised concerns about whether the full extent of Archegos’ apparent risk exposure has been realized, or if further lender selling is still possible.
“There is widespread selling because there is uncertainty about who’s involved,” Seema Shah, chief strategist at Principal Global Investors, told the WSJ. “It is fear specific to this, specific volatility around that circumstance.”
Nevertheless, the broader equity markets are on pace to post a positive return for the first quarter. Some, though, warned that trading could remain volatile for the first half of the week as fund managers adjust positions in anticipation of the end of the quarter.
“It’s true that the market in the short-term may be slightly overbought. We are probably starting to get used to the good news (but) the trend is clearly positive,” Marco Pirondini, U.S. head of equities at Amundi Pioneer, told Reuters.
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