It has been an interesting couple of days. The US markets dropped by more in two days than in any two-day period in history, and the rot will continue. Even a sort-of-good jobs report for March did not help the markets. I cannot understand the jobs report, as it coincides with the first month of big layoffs in the federal government and the ripple effect of cancelled government contracts and grants.
Year-to-date, from before Trump was inaugurated to yesterday, the US markets have given up everything and lost significant ground. Savings and investments are being devastated.
The Dow Jones Industrial Average (which really represents a relatively small number of very large companies) is down almost 10%, while the Nasdaq (technology companies) and the Russell (a broader range of companies) are both down almost 20% from January 1st. Those falls will undermine any company's ability to access capital and push up borrowing costs. For those that have fallen further than the averages of the groups, they may reach a point at which banking covenants are being breached, and debt will either need to be repaid or refinanced at significantly higher rates – if they can access the capital markets at rates they can afford.
$6 trillion wiped out. Real money? In a way, yes, and in a way, no. Share values are not ‘real’ until you sell your shares, or until you use them as collateral. And that is where the hurt happens. The use of shares as collateral for loans and lines of credit, with requirements that the nominal value of the shares does not fall below a certain level. What that level is, is known only at the individual contract level, but a 20% drop in the nominal value must bring many contracts close to covenant levels.
If the shares are leveraged at a 25% premium, and the share value drops by 20%, those leveraged positions are getting pretty close to having to be closed, and that will spur a round of liquidation to cover leverage positions. And the cycle continues downward.
Across the insurance industry, falling share values impact solvency and could put some insurance companies in a position of requiring additional capital from shareholders - more debt at unpleasant rates.
The Financial Times said:
Hedge funds have been hit with the biggest margin calls since Covid shut down huge parts of the global economy in 2020, after Donald Trump’s tariffs triggered a powerful rout in global financial markets.
Wall Street banks have asked their hedge fund clients to stump up more money as security for their loans because the value of their holdings had tumbled, according to three people familiar with the matter. Several big banks have issued the largest margin calls to their clients since the beginning of the pandemic in early 2020.
The margin calls underscore the intense turbulence in global markets on Thursday and Friday as Trump’s tariffs announcement was followed by retaliatory duties by China, and other countries readied their own responses. Wall Street’s S&P 500 share index was set to post its worst week since 2020, while oil and riskier corporate bonds have sold off heavily.
(https://archive.is/HEuGt#selection-2149.0-2165.245)
Monday might have a bounce in values. A “Dead Cat Bounce” followed by more selling on Tuesday? Or a stabilising of positions with a belief that the pain has been taken and future share value levels have been met? The fact that the tariffs were so much worse than expected, and that international response to the tariffs is still developing, suggests that there is more ‘downside’ ahead.
Yes, this could be a full-scale rout of markets.
All fund managers around the world are going to be asking themselves exactly the same questions over the weekend.
- Is this over?
- Have we seen the worst?
- Are potential international responses ‘priced in’ to the markets’ lower prices?
Answer ‘no’ to any of those questions, and there will be more selling pressure to come.
The Amerikan perception that the only trade in the world that matters is bilateral with the US is, frankly, stupid. Yes, the total volume of global trade will fall, and economic activity around the world will fall. But at the same time, trade between nations will continue, and much of the trade that was bilateral with the US will become multilateral between countries.
Huge pain coming, in the US of Amerika and globally.
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