Observations & Insight
Editor’s Note: The JLN Options Newsletter will not be published on Monday, July 4 in observation of the Independence Day holiday. Have a great weekend!
Lead Stories
Bears Picked Right Stocks to Short With Declines Twice the S&P’s
Lu Wang – Bloomberg
To state the obvious, it has been a good time to be short the market. But the success of bearish traders in 2022 goes beyond luck.
With the S&P 500 down about 20% over the six months, baskets tuned to the favorite bets of those speculating on declines are showing bigger losses. An index of most-shorted stocks kept by Goldman Sachs Group Inc., for instance, is down 37%, suggesting the pessimists have done a particularly good job trawling for companies most exposed to the downdraft.
/jlne.ws/3OATVXL
Mohamed El-Erian Says Receding Liquidity Is Biggest Risk to Markets
John McCorry and Jonathan Ferro – Bloomberg
Markets influencer Mohamed El-Erian says the potential evaporation of liquidity is a big risk to global markets and economies amid signs that capital is becoming more expensive and difficult to acquire.
“The one risk I’m really worried about is liquidity risk,” El-Erian told Bloomberg Television’s The Open on Friday. “We’re starting to see markets locked out of funding. Issuance in June was very low. Companies either were unwilling or unable to refinance themselves.”
/jlne.ws/3yzVHDb
BOE Warns Margin Call Model May Underestimate Hedge Fund Risk
Greg Ritchie and Libby Cherry – Bloomberg
Banks may not be demanding enough collateral from hedge funds to satisfy new margin rules that are set to go live in September, a UK regulator said.
The Bank of England’s Prudential Regulation Authority, or PRA, has told banks that a widely-used model to calculate margin requirements doesn’t appear to accurately reflect the risk some funds face in unlisted securities trades. The warning comes just months before hundreds of hedge funds and other firms come under the scope of rules expected to drive up costs in the $12.4 trillion derivatives market.
/jlne.ws/3Agvhr9
Risk Management Is Top of Mind for Investors and Hedge Funds
Alyson Velati – BusinessInsider
After a good run for most in 2021, hedge funds and their investors are expecting choppy markets for the next few months.
Investors overseeing pension and endowments, like College of the Holy Cross’s Dan Ricciardi, are making sure that the hedge funds they hire to help manage their pools of capital are managing risk as they brace for more volatility.
/jlne.ws/3yz1ety
U.S. stocks turn lower as disappointing ISM reading underlines slowdown fears
William Watts and Jamie Chisholm – MarketWatch
U.S. stocks gave up modest early gains Friday, turning lower after a disappointing gauge of manufacturing activity underlined fears that aggressive monetary tightening by the Federal Reserve could lead to a sharp slowdown.
/jlne.ws/3OXgINn
Michael Burry of ‘The Big Short’ fame thinks the market selloff may be ‘halfway there’
Barbara Kollmeyer – MarketWatch
Blink and you’ll miss market-missive tweets doled out sparingly from Michael Burry, the investor who rose to fame after correctly predicting the collapse of the U.S. market.
In his latest now-you-see-it-now-you-don’t tweet, the founder of Scion Asset Management appeared to be flagging that markets may be halfway through the recent selloff, following a bleak first half that marked the worst since 1970 for the S&P 500.
/jlne.ws/3ycvusX
Another inflation record firms case for bigger ECB rate hikes
Reuters
Euro zone inflation hit yet another record high in June as price pressures broadened, and its peak could still be months away, firming the case for rapid European Central Bank rate hikes starting this month.
Consumer price growth in the 19 countries sharing the euro accelerated to 8.6% from 8.1%, Eurostat said on Friday, higher than expectations for 8.4% and driven primarily by energy prices even as food and services also made a marked contribution.
/jlne.ws/3NGfZz4
Regulation & Enforcement
UBS’s ‘Hurricane Insurance’ Blasted Portfolios, SEC Says. The Bank Is Paying.
Bill Alpert – Barron’s
Federal regulators charged UBS Group with defrauding investment advisory clients with a disastrous trading strategy that was marketed as “hurricane insurance” for portfolios but instead lost 18% in the volatile year of 2018.
Without admitting the Securities and Exchange Commission’s allegations, UBS agreed to settle the administrative charges with nearly $25 million in payments. Most will go to the hundreds of customers the bank put into the “Yield Enhancement Strategy” it called YES.
/jlne.ws/3AgxyCQ
ESMA recognises US-based clearing houses OCC and FICC; In contrast, UK-CCPs have only been granted time limited equivalence of three years to reduce EU institutions reliance on them.
Annabel Smith – The Trade
ESMA has recognised US-based Fixed Income Clearing Corporation (FICC) and the Options Clearing Corporation (OCC) as Tier one central counterparties under Emir regulation. On 27 June the European securities markets regulator recognised for the first time the two CCPs which are also supervised by the US’ Securities and Exchanges Commission (SEC) and Commodity Futures Trading Commission (CFTC).
/jlne.ws/3bC14bT
Education
Risk vs. Volatility: What’s the Difference? – Forbes Advisor
Rebecca Baldridge – Forbes
All investing involves risk. No matter which assets you own, risk means that they can lose some or even all of their value due to unforeseen market developments.
Volatility is another investing fact of life. The value of any given asset never remains static for long, and the magnitude of gains and losses can be enough to scare the daylights out of even the most seasoned investors.
/jlne.ws/3nxhR2t
Miscellaneous
Can crypto contagion infect mainstream finance?
Financial Times
The crypto carnage has one silver lining: the broader financial system has been spared.
From Brussels to Washington, finance watchdogs downplay the risk of turmoil spilling into other markets and argue that their own actions have protected banks from the crypto tailspin.
/jlne.ws/3NAkFGE
