Tuesday's Market Minute: Margin Calls And Oil Volatility

News that the stranded container vessel appears to have been refloated in the Suez Canal sent crude oil prices immediately lower intraday, only to have recovered and close in the green. The impact of the Suez Canal crisis on oil markets has been marginal due to several factors including slowing demand, especially in the E.U., relatively high inventory figures, and the low volumes of crude oil passing through the canal (less than 5% of global supply). A backlog of a few hundred ships will most likely take weeks to normalize, and the economic and financial impact may be felt for months. Volatile trading in oil is probably set to continue even if the Suez Canal situation is fully corrected in short order. Prices will likely consolidate until the OPEC+ scheduled meeting this week where members will decide on its production policy in May. While multiple factors may impact the group's decision, the markets seem to have priced in an expected rollover of current cuts through May.

Drama on Wall Street affected several areas of the market, which had started to look beyond massive stimulus and life after COVID-19. The aftermath of Archegos Capital’s margin calls that led to the liquidation of over $20 billion in stocks will not be immediately resolved. However, the S&P 500 index was only down modestly, and therefore damage appears to be contained. Credit Suisse Group CS and Nomura Holdings Inc NMR were down over 13% after warning of potentially significant losses, while Goldman Sachs Group Inc GS and Morgan Stanley MS were quietly down a few percentage points over losses that are being reported as likely immaterial.

As of now, it does seem like the Friday smackdown of Viacom VIAC, Discovery Communications Inc DISCA, and many Chinese tech stocks is a one-off event. Undoubtedly, the over-leveraging done by Archegos Capital Management will force every prime broker to review their books in anticipation of regulatory scrutiny. When you look at the stocks that were incorrectly bet on, one must ponder if the V-shaped, non-tech stock post-vaccine related recovery got a bit out of hand. Investors must remain aware the reopening of the economy trade will continue, but the path for U.S. stocks will be complicated. Filled with fresh risks and intense scrutiny, U.S. stocks will likely finish the year higher.

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