Clear evidence of position liquidation has dampened enthusiasm among share investors. Reports that at least one institutional investor was forced to raise capital by selling large chunks of stock heightened fears about rising interest rates. Investors fear a combination of increased leverage and higher holding cost for leveraged positions could see panic selling in markets that are at or near record highs.
Last Friday $20 billion of off-market block trades in various US stocks led to reports that a hedge fund sold the stock to meet margin calls on equity swap positions. This is a trivial amount in the context of the S&P 500 index’s market capitalisation, which is greater than $33 trillion. However investors are concerned this is the visible tip of a much larger problem.
The picture emerging from speculative discussions among traders is more familiar. A trader who invested in certain stocks came under pressure from short sellers. Rather than take the loss on the chin, the trader may have borrowed funds to increase their buying and thereby squeeze the short sellers, a la GameStop. However the stocks potentially involved (Viacom and Discovery) are much larger than GameStop, and the squeeze is more difficult to achieve. It seems the short sellers prevailed and flushed the squeezer out of their long positions.
If this speculation among traders is correct, there is little to no systemic risk, despite the fact the methods employed may sound predatory. This is the normal state of play among large market participants. Risks of contagion cannot be ruled out, but there is little evidence to support those market concerns at the moment.
Regardless, the US dollar lifted again, a sign of lingering concerns about the outlook and inflation. However gold and cryptocurrencies were largely unmoved. Futures markets indicate Asia Pacific stocks will recapture some of yesterday’s loses, given the more benign reactions in Europe and the US to the weekend news.
Data releases over the next 24 hours could determine market action as the month and quarter end approaches. Today brings retail sales in Japan. Tonight sees German inflation, and US home sales and consumer confidence.