U.S. dollar share of global FX reserves dips to 59% in fourth quarter 2020

Bloomberg

Block Trade Mess Revives Fierce Debate on ‘Leverage Gone Wrong’

(Bloomberg) — What might be the largest margin call in history is ringing fresh alarm bells on Wall Street among those worried about hidden leverage and its potential to fry the financial system.The forced selling of more than $20 billion of apparently swap-linked shares at Bill Hwang’s Archegos Capital Management has set off a hunt for other areas of excess — from margin debt to options and bloated balance sheets — after stocks at the center of the fiasco plunged and investment banks warned of losses.As with most things in markets, opinions vary: Hwang’s travails are portrayed as everything from phase one of a long-overdue market comeuppance, to an isolated case of risk-taking run amok. While Wall Street may have sidestepped a systemic cataclysm, the blowup is an example of “leverage gone wrong” with ominous portents, said Sameer Samana, Wells Fargo Investment Institute’s senior global market strategist.“What it does make me think of is how much leverage in aggregate has now built up in the system” in brokerage accounts, options and credit, Samana said. “If a broader stock market pullback were to take shape, especially in the more widely owned areas of technology and technology-related stocks, a much bigger unwind would have to take place.”On Monday, at least, the S&P 500 Index was barely registering the weekend’s tribulations, its 57% rally since March 2020 intact.Margin DebtIn recent weeks, as stocks vaulted to new highs, investors have pointed to a worrying trend at brokerages: ballooning margin debt, which at $813 billion at the end February stood at historically high levels (the numbers are reported on a delay). What’s sometimes lost in the discussion is that such debt almost always rises with the value of equities.“It would be common sense for one to look at this and say, we have a normal amount of margin debt in the system right now for where the market is,” said Arthur Hogan, chief market strategist at National Securities Corp. “I don’t know that that would have been a clear signal as to what’s going on in some of these media stocks and send a warning signal, because you would suspect that in a rising market the margin debt is going to be higher.”But not every lens into the phenomenon is reassuring, according to Jason Goepfert, president of Sundial Capital Research. Assuming that it will exceed $831 billion when this month’s numbers are reported in April, margin debt will have grown more than 70% year-over-year, one of the sharpest expansions since 1931. That means the year-over-year change in debt will have exceeded the year-over-year change in the S&P 500 by more than 20 percentage points for three months running.“This kind of excessive and persistent growth in debt, on both an absolute and relative level, has been a boogeyman for forward returns,” Goepfert wrote in a recent note to clients. “The most effective use of the data, both on the upside and downside, has been the rate of change, including relative to the S&P. And that’s why it’s becoming to be a much larger concern.”Options FrenzySpeculative mania in the options market has also fueled bubble warnings for the better part of a year. Call contracts — in which bulls pay a fraction of a stock’s price to bet it will rise — became the playthings of newly minted day traders, whose enthusiasm for short-dated options is theorized to have fueled a series of bullish feedback loops, particularly in tech stocks.“As you’re in a bull market with a lot of liquidity, you start to get some areas of overconfidence and some investors let their guard down,” said Keith Lerner, chief market strategist at Truist Advisory Services. “It does suggest a level of overconfidence.”However, that call volume has eroded from February’s peaks suggests some of the craze for the products is diminishing. Over the past 20 days, an average of…