Of Margin Calls & Liquidations…
There will be more volatility to come as we head into the month and quarter end, with rebalancing flows and also reduced trading volumes ahead of the Good Friday long weekend.
Market is rife with rumours of huge block sales of stocks due to liquidation triggered by margin calls and rumours of more selling to come.
However, amid all this noise, S&P500 and the Dow Jones Index continue to march higher to close in on all-time highs. There will be more volatility to come as we head into the month and quarter end, with rebalancing flows and also reduced trading volumes ahead of the Good Friday long weekend.
Caution is warranted, but the big picture remains the same. Liquidations and forced trades by the weakened hands will always create opportunities for the stronger hands.
What happens at Financial Year Ends?
The Japanese financial year closes on 31 march and sometimes “weird” market movements happen around this time. With the impending closing of accounting books, many Japanese entities and funds will want to reduce their balance sheet usage (by selling out assets) and to lock in the profits and losses for the financial year.
Sometimes, they may even engage in “window dressing” and try to post good “closing prices” for the assets they own and try to get a favourable FX rate (USDJPY, EURJPY) to value their holdings. As such, expect confusing volatility on the last day of trading.
And when the clock turns with the start of a new financial year, investors who have reduced their risk and holdings will need now to deploy their capital for the new financial year. With US bonds having been crushed this quarter, it may start to look attractive to investors who will need to deploy into bonds.
It may sound a little weird to sell into quarter/year end, just to buy back again when the next quarter/year begins but professional investors are humans after all, and have calendar and fiscal year milestones to adhere to.
For those of us who do not have such restrictions, being aware of these market characteristics can often bring to light opportunities that arise in such circumstances.
As markets reassess how soon European economies will be able to reopen, the jobs data (March nonfarm payrolls report) out of the United States will likely highlight the widening growth disparity between the two regions. The expected strong US data could help maintain the Dollar’s upward drive but ultimately, its path will be determined by whether or not risk appetite bounces back. Risk sentiment has been fragile of late as an increasingly bitter spat between the UK and EU over vaccine exports and revived Sino-US tensions have added to the downbeat tone set by Europe’s lockdown woes. But in a week where trading is expected to wind down ahead of the long Easter weekend, there’s not much on the horizon that could turn sentiment around except the impending start of a new quarter.
1. Currencies : Keep short USD and long NZD, & CNH. USDCNH is still stuck close to the top end of the 6.45–6.55 range for now. NZD is showing some encouraging signs of life.
2. Commodities : Silver — Support for Silver is at 24.70–80. It continues to flirt with support levels. Caution is warranted.
Key risks: Spikes in US bond yields may lead to a stronger USD and weaken risk sentiment. .
3. Equities :
Equity Index: : Long Nasdaq futures. Market tried lower yet again but managed to post a strong positive with a strong recovery off the lows in the last 2 hours of trading. Volatility will be high as we head towards month and quarter end especially amid rumours of more margin call liquidation by major investment banks.
Single Stocks: As the market stabilises, certain sectors which have been trending higher will resume their strong rallies. Don’t miss out on the asymmetric opportunities we have highlighted in our TrackRecord Model Portfolio.
Key risks : Higher US yields and inflation fears are the key risks.
WHAT HAPPENED YESTERDAY
As of New York Close 26 Mar 2021,
- US 10-yr Bond yield increased 3 basis points to 1.67% amid renewed selling interest in the bond market. The 2-yr yield remained unchanged at 0.14%. The U.S. Dollar Index decreased -0.2% to 92.71. WTI crude futures rose +4.2% to $60.99/bbl.
- S&P 500 advanced +1.7% (futures intraday low: -0.17%) on Friday, thanks to a strong finish in the last hour of action. The Nasdaq100 gained +1.2% after briefly slipping lower (with an intraday low of -0.74% in its futures) in the afternoon. The Dow Jones Industrial Average (+1.4%, futures intraday low: -0.02%) and Russell 2000 (+1.8%, futures intraday low: -0.27%) also gained more than +1.0%. Tech stocks recovered strongly off the lows in the last hours of trading despite massive block sales from investment banks (Goldman Sachs, Morgan Stanley) supposedly triggered by margin calls of a big leveraged fund.
- The gains were relatively broad, with ten of the 11 S&P sectors closing higher and eight rising more than 1.5%. The energy (+2.6%), information technology (+2.5%), materials (+2.5%), and real estate (+2.5%) sectors gained more than 2.0%, while the communication services sector (-0.3%) was the lone holdout.
- Semiconductor stocks were a pocket of strength on Friday, evident by the +5.0% gain in the Philadelphia Semiconductor Index (+5.0%). They helped provide the boost in the technology sector, which started the day unchanged.
HEADLINES & MARKET IMPACT
Notable Snippet: Suez Canal salvage teams were alternating between dredging and tugging on Sunday to dislodge a massive container ship blocking the busy waterway, while two sources said efforts had been complicated by rock under the ship’s bow. At least 369 boats are waiting to transit the canal, Rabie said, including dozens of container ships, bulk carriers, oil tankers and liquefied natural gas (LNG) or liquefied petroleum gas (LPG) vessels. About 15% of world shipping traffic transits the Suez Canal, which is a key source of foreign currency revenues for Egypt. The current stoppage is costing the canal $14–15 million daily.
Notable Snippet: Sweden’s vaccine coordinator said on Sunday repeated delays of COVID-19 vaccine deliveries meant Sweden would not be able to meet the target of having all adults vaccinated by June 30. Sweden, which has rejected lockdowns throughout the pandemic, is rushing to get its population vaccinated amid a third wave of the pandemic. It registered its highest number of new cases since the end of last year on Thursday, although deaths remain at a relatively low level.
THEMATIC CONTEXT: “Countries should not rest on their laurels because viruses do not take days off. As countries with successful vaccine drives continue to open up while those who are slow to inoculate and are nonchalant about safety practices fall back into the doldrums, we will see a bifurcation in economic activity even across developed world economies and we suspect this will show up in FX rates. As such we continue to be more constructive towards Asia Pacific currencies like the CNH, SGD and AUD.” — 20th Mar 2021
Notable Snippet: U.S. Secretary of State Antony Blinken said on Sunday he sees “increasingly adversarial” aspects to the United States’ relationship with China. “There are clearly increasingly adversarial aspects to the relationship, there are certainly competitive ones,” Blinken told CNN, adding that there were also areas of cooperation between the two countries. The United States on Saturday condemned China’s sanctions against two U.S. religious rights officials and a Canadian lawmaker in a dispute over Beijing’s treatment of Uighur Muslims and other minorities.
THEMATIC CONTEXT: “As tensions between Washington and Beijing rise, the potential decoupling of the world’s two largest economies presents significant risks, a prospect that is firming China’s push towards more reliance on its own vast domestic market (Dual-Circulation). We believe this will be positive for the CNH in the long run (USDCNH to trade lower over time).” — 10th Sep 2020
Phan Vee Leung
CIO & Founder, TrackRecord