Banks lead Wall Street lower on hedge fund default concerns

(Reuters) – Wall Street’s main indexes fell on Monday after a surge in the previous session, as global banks said they faced potential losses of billion of dollars from a hedge fund’s default on margin calls.

Nomura and Credit Suisse warned of significant hit after the U.S. hedge fund, named by sources as Archegos Capital, defaulted, hitting shares in some big media and Chinese technology companies.

Shares in Morgan Stanley fell about 4% after the Financial Times reported it had also sold billions of shares, while the banks index shed about 3%.

The news has raised concerns about whether the full extent of Archegos’ apparent wipeout has been realized or whether there was more selling to come from other lenders.

Nomura still has positions to unwind, Bloomberg reported, citing a Japan government official.

Discovery Inc, ViacomCBS, U.S.-listed shares of Baidu and VIPShop, all linked to Archegos, dropped between 2% and 9%. Theses stocks lost between 30% and 50% of their value last week.

Wall Street’s fear gauge rose 2.57 points to 21.50 points.

“It’s a black eye for the financial industry because it suggests that there still may not be a full handle on risk control when it comes to leveraged trading,” said Rick Meckler, a partner at Cherry Lane Investments in New Vernon, New Jersey.

“This seems like a pretty specific case. It could lead to increased regulation … but the impact on broader markets is going to be small.”

The Dow and the S&P 500 hit record closing highs on Friday on optimism about speedy vaccinations and record stimulus, while the tech-heavy Nasdaq is still 7.1% from its February all-time closing high.

Financials, energy and technology fell the most among S&P sectors. Utilities, the best performing sector this month, firmed 1%.

“It’s true that the market in the short-term may be slightly overbought. We are probably starting to get used to the good news (but) the trend is clearly positive,” said Marco Pirondini, U.S. head of equities at Amundi Pioneer in Boston.

The Nasdaq is set to post its first monthly decline in five while the S&P 500 and Dow are headed for their second consecutive monthly gains.

At 10:04 a.m. ET, the Dow Jones Industrial Average was down 0.24%, at 32,992.56, the S&P 500 was down 0.45%, at 3,956.57, and the Nasdaq Composite was down 0.93%, at 13,016.32.

Planemaker Boeing Co rose 2.2% after reaching a deal with U.S. budget carrier Southwest Airlines Co for a variant of the 737 MAX aircraft. Southwest’s shares gained 0.5%.

Bitcoin prices added 3.8% after Visa Inc said it would allow the use of the cryptocurrency USD Coin to settle transactions on its payment network.

Declining issues outnumbered advancers 2.6-to-1 on the NYSE and 3.5-to-1 on the Nasdaq.

The S&P index recorded 62 new 52-week highs and no new low, while the Nasdaq recorded 96 new highs and 56 new lows.

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