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Global shares slip after hedge fund's default

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Herbert Lash
·5-min read
FILE PHOTO: New York Stock Exchange (NYSE) building after the start of Thursday's trading session
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By Herbert Lash

NEW YORK (Reuters) - The dollar gained and a gauge of global equities halted a slide on Monday as investors discounted any long-term impact from a hedge fund's default that roiled banks after Nomura and Credit Suisse warned of billions of dollars in losses.

Crude prices edged higher after a report that Russia would support stable oil output from the Organization of the Petroleum Exporting Countries and allies ahead of a meeting with the producer group later this week.

Nomura said it faced a potential $2 billion loss due to transactions with an unnamed U.S. client while Credit Suisse said a default on margin calls by a U.S.-based fund could be "highly significant and material" to first-quarter results.

Losses at the hedge fund, named by sources as Archegos Capital Management, triggered a fire sale of stocks on Friday.

Nomura shares in Japan closed down 16.3%, a record one-day drop, while Credit Suisse shares fell 13.8%.

Stocks on Wall Street rebounded a bit, with the S&P 500 recouping most earlier losses, as investors looked ahead to an economy set to boom as it reopens from the coronavirus pandemic, said Edward Moya, senior market analysts at OANDA in New York.

"What we're starting to see is that Wall Street firmly believes this is not systemic, this is not the end of the bull market cycle and we're going to see the market primarily focus on the reopening trade," Moya said.

Investors bought so-called value shares that are likely to do well in the recovery, pushing up the healthcare, communications services and consumer staples sectors. Financials fell on the Archegos default and technology sectors slid as bond yields rose and investors sold growth-oriented shares.

(Graphic: Value vs Growth: https://fingfx.thomsonreuters.com/gfx/mkt/rlgvdbbawvo/Pasted%20image%201617048524659.png)

MSCI's all-country world index fell 0.08% while Europe's broad FTSEurofirst 300 index added 0.19% to close at 1,647.63.

On Wall Street, the Dow Jones Industrial Average rose 0.3%, the S&P 500 lost 0.09% and the Nasdaq Composite dropped 0.6%.

The Archegos default is likely confined but with portfolio rebalancing at quarter end, "weird stuff" can happen at funds that are over-leveraged, said Thomas Hayes, chairman and managing member at New York hedge fund Great Hill Capital LLC.

"It was a confluence of several events compounded by the recent sell-off and weakness in the tech sector, which most hedge funds are leveraged to," Hayes said.

Financial and bank shares fell on both sides of the Atlantic. The financial services index in Europe lost 2% and the region's banks sector fell 1.0%.

The U.S. KBW bank index fell 2.3% as JPMorgan Chase & Co fell 1.6%, the second biggest weight on the S&P 500 after Microsoft Corp, which eased 0.6%. Wells Fargo & Co, down 3.3%, was the fifth biggest weight on the S&P.

In Europe, Germany's DAX index closed up 0.5% to an all-time high after data over the weekend showed annual profit at Chinese industrial firms surged in January and February, highlighting a rebound in China's manufacturing sector.

The French CAC 40 also gained 0.5%, while London's FTSE slid 0.1%.

(Graphic: Global markets since the start of the year: https://fingfx.thomsonreuters.com/gfx/mkt/jznvngglopl/Pasted%20image%201617034480315.png)

The dollar gained in choppy trading, with the euro trading below $1.18 and commodity currencies falling, as the greenback drew some safe-haven bids on concerns about the potential fallout from the Archegos default. The dollar index, a measure of the greenback's value against six other major currencies, hit as high as 92.964, its strongest level since November.

The index rose 0.161%, with the euro down 0.25% to $1.1763. The Japanese yen weakened 0.14% versus the greenback to 109.80 per dollar.

Euro zone government bond yields rose as relief from the refloating of the container ship blocking the Suez Canal prompted some selling of safe-haven assets. But rising COVID-19 cases kept investors broadly cautious about Europe.

German yields rose on Friday and continued to climb on Monday. The 10-year bund yield rose 0.9 basis point to a six-day high of minus 0.31%.

Longer-dated Treasury yields rose on investor expectations that U.S. President Joe Biden's infrastructure initiative to be announced on Wednesday could mean faster economic growth and a dramatic increase in Treasury bond issuance.

The 10-year U.S. Treasury note rose 5 basis points to 1.7099%.

Oil also rebounded after the Ever Given container ship that has blocked the Suez Canal for nearly a week was refloated and traffic in the waterway resumed.

Brent crude futures rose 41 cents to settle at $64.98 a barrel, while U.S. crude futures settled up 59 cents to $61.56 a barrel.

Gold slipped more than 1% to a more than two-week low as a firm dollar and rising U.S. Treasury yields dented the safe-haven metal's appeal. Gold also was pressured by bets for a swift U.S. economic recovery.

U.S. gold futures settled down 1.2% at $1,712.20 per ounce.

(Reporting by Herbert Lash; Editing by Jonathan Oatis, Will Dunham and Sonya Hepinstall)