Dow ekes out record, stocks end mostly lower on jitters tied to investment fund margin call

Stocks closed mostly lower on Monday amid concerns about potential spillover after a large investment fund was forced to sell massive holdings in stocks, causing prices to tumble.

Investors were monitoring news reports that former Tiger Asia manager Bill Hwang’s Archegos Capital Management had unwound big bets late last week after facing margin calls.

How did stock markets perform?
  • The Dow Jones Industrial Average
    rose 98.49 points, or 0.3%, to close at 33,171.37, a record close, after erasing an earlier losses.

  • The S&P 500 index
    fell 3.45 points, or 0.1%, ending at 3,971.09.

  • The Nasdaq Composite
    slumped 79.08 points, or 0.6%, finishing at 13,059.65.

  • The Russell 2000
    of small-cap stocks tumbled 2.8% to end at 2,158.68.

On Friday, the Dow notched a 1.4% increase, the S&P 500 added 1.6%, and the Nasdaq Composite Index fell 0.6%.

What drove the market?

The Dow flipped positive in afternoon trade to close up nearly 100 points, despite lingering jitters tied to reports that Hwang’s Archegos Capital Management recently sold some $30 billion in holdings to meet margin calls, according to The Wall Street Journal, citing people familiar with the matter.

“Are there others? I’m sure there are,” said David Barse, founder and chief executive of XOUT Capital, of funds that combine leverage with higher-risk investment strategies that if caught off guard could cause prices of their holdings to at least temporarily tumble. “I’m sure banks are looking very carefully at that,” he told MarketWatch, while adding that brokers are also likely “tightening their risk profiles on clients.”

“My response is don’t own single-stock risk,” Barse said, “unless you know more about the stock than the marketplace, because it could be that something you have no control over is going to impair your investment.”

But Barse also said that unlike during the 2008 financial crisis, leverage isn’t being broadly paired with derivatives, which amplified global financial losses more than a decade ago.

Even so, the bulk asset sales last Friday drove shares of Discovery
and ViacomCBS
to register their worst one-day declines on record. Shares of both companies fell again Monday.

Global investment banks Credit Suisse Group
and Nomura Holdings
on Monday said they were likely to take hits due to the volatility in the market, but didn’t directly name Hwang’s fund.

“A significant U.S.-based hedge fund defaulted on margin calls made last week by Credit Suisse and certain other banks,” said Credit Suisse. “Following the failure of the fund to meet these margin commitments, Credit Suisse and a number of other banks are in the process of exiting these positions.”

The buzz around the margin call comes at the start of a holiday-shortened week, as investors brace for a fresh round of volatility. Some markets will be closed in observance of Good Friday, including those in the U.S., and some European markets will remain closed next week for Easter Monday.

Meanwhile, tugs finally dislodged the 1,300-foot Ever Given container ship, operated by Taiwan-based Evergreen Group, which had been blocking the Suez Canal, one of the busiest trade waterways in the world, causing massive logjams.

On the public-health front, President Biden said on Monday that 90% of adults in the U.S. would be eligible for vaccines by April 19, with the rest eligible by May 1. The global coronavirus tally rose above 127 million on Monday, according to data aggregated by Johns Hopkins University, with the U.S. accounting for a quarter of that number, at more than 30 million.

Markets have been climbing unsteadily in the past few weeks due to worries about a resurgence of COVID-19 in Europe that has forced extended lockdown periods, even as vaccine rollouts and some $1.9 trillion in COVID stimulus in the U.S. has helped to support the domestic economy, while also lifting benchmark bond yields.

Read: U.S. Treasury debt markets on pace for worst quarter since 2016

“We are getting fairly close to the point where Europe could lose a second tourist season in a row,” said Cameron Brandt, director of research at EPFR, in an interview. “That’s really going to shackle them even when the recovery arrives.”

But Brandt also said a key question in the U.S. will be whether trillions worth of stimulus will have a lasting impact on the economy.

“Is that going to buy us a recovery or just a bit of a sugar rush?” he said. “In the coming weeks, that’s what we are going to be talking about.”

Which stocks were in focus?
  • Southwest Airlines Co.
    shares fell 0.5% Monday after the airline placed 100 firm orders for the Boeing 737 Max 7 with the first 30 of those aircraft to be delivered in 2022. As part of an agreement with Boeing
    Southwest also converted 70 Max 8 firm orders to Max 7 firm orders and added 155 MAX options for MAX 7 or MAX 8 aircraft for years 2022 through 2029. 

  • Cal-Maine Foods Inc. shares
    shed 1.4% Monday, after the egg producer posted a far bigger-than-expected profit for its fiscal third quarter, offsetting a sales miss. 

  • Shares of Goldman Sachs Group Inc.
    and Morgan Stanley
    which were reportedly part of the Hwang block trades, also were in focus Monday.

  • Moderna Inc. MRNA said it has shipped the 100 millionth dose of its COVID-19 vaccine to the U.S. government and expects to meet its commitment dates for all current orders. Its shares fell 7.4%.

  • Insurer The Allstate Corp.
     said Monday it expects to book a net loss of about $4 billion as it completes the exit of its life and annuity businesses. Allstate’s shares gained 2.3%.

  • Applied Materials Inc. AMAT shares fell 2.3% Monday after the company said its agreement to purchase Kokusai Electric Corp. was terminated because the company didn’t obtain approval for the deal by Chinese regulators in time.

How did other assets fare?
  • The 10-year Treasury note yieldBX:TMUBMUSD10Y rose 6.3 basis points to 1.721%. Bond prices move inversely to yields.

  • The ICE U.S. Dollar index
    a benchmark of the dollar’s value versus its major rivals, was up 0.2% at 92.93.

  • The Stoxx Europe 600 index
    closed up 0.2%, while the U.K.’s FTSE 100
    shed 0.1%. The Nikkei
    closed up 0.7%, and China’s CSI 300 index
    rose 0.2%.

  • The U.S. crude benchmark
    shook off earlier pressure, closing up 1% to settle at $61.56 a barrel, on the New York Mercantile Exchange. Prices for gold futures
    tumbled 1.2% to settle at $1,712.20 an ounce.

Mark DeCambre contributed reporting