Everywhere
Doug Nolan
The Goldman Sachs Most Short Index surged 15.0% over the past five sessions.
The Semiconductors rallied 10.6%, with Intel up 20.6%, Micron 17.4%, Analog Devices 17.8%, Broadcom 16.2%, and Applied Materials 14.5%.
Bloomberg’s MAG7 index jumped 6.3% over five sessions.
Google rallied 10.6%, Meta Platforms 10.0%, Tesla 8.8%, and Amazon 7.4%.
The small cap Russell 2000 surged 8.5%.
The NYSE Broker/Dealer Index jumped 6.6%, and the KBW Bank Index rose 5.6%.
Robinhood spiked 21.0% in five sessions.
Morgan Stanley and Goldman Sachs jumped 6.8% and 6.9%.
Carvana surged 19.6%, as Capital One rallied 8.3%.
Europe’s STOXX 600 Banks Index jumped 4.4% this week, with Japan’s TOPIX Bank Index rallying 4.1%.
It's not just that U.S. and global markets are now in a hyper volatile condition.
Marketplace liquidity has turned acutely unstable.
In general, global markets are in a state of liquidity overabundance, fueled by unprecedented leveraged speculation across markets.
At the same time, risk aversion has made some headway in key sectors including crypto and AI.
Overheated markets are vulnerable to risk aversion developing into a more systemic de-risking/deleveraging dynamic.
November 25 – Financial Times (George Steer and Tim Bradshaw):
“Nvidia shares fell sharply on Tuesday on fears that Google is gaining ground in artificial intelligence, erasing $115bn in market value from the AI chipmaker.
Nvidia’s shares closed 2.6% lower after having shed more than 7% in early trading.
The declines rippled through companies linked to the chipmaker.
Server maker Super Micro Computer… fell 2.5% while software group Oracle, which has committed to spending billions of dollars on the chipmaker’s… systems, lost 1.6%.
Shares in data centre operator CoreWeave, in which Nvidia owns a 6% stake, fell 3.1%, alongside its AI cloud rival Nebius, which was down 3.3%.
Investors blamed the declines on excitement surrounding Alphabet’s own AI-specialised chips, known as tensor processing units.
Google last week released Gemini 3, its latest large language model, which is considered to have leapfrogged OpenAI’s ChatGPT.
The search groups’ model was trained using TPUs rather than the Nvidia chips that power OpenAI’s systems.”
November 27 – Financial Times (Robin Wigglesworth):
“Oracle has emerged as the weakest member of the AI hyperscaler herd, with hedge funds now shorting both its stock and debt.
Morgan Stanley’s credit analysts think things are going to get even worse.
The investment bank’s analysts Lindsay Tyler and David Hamburger had previously recommended investors buy credit-default swaps on Oracle, but hedging the exposure with long positions in its bonds…
They’re now recommending that investors ditch the bonds and simply go long Oracle CDS, because of its ‘funding gap, growing balance sheet, capex & obsolescence risk, ratings pressure, counterparty risk, and more’.”
Bucking the market rally, Nvidia declined 1.2% this week.
The stock is down 12.7% for the month.
Strategy sank 34.5% in November, Super Micro Computer 35.7%, Oracle 23.3%, Coinbase 21.0%, Arm Holdings 20.9%, Dell 18.2%, Palantir 16.7% and AMD 15.6%.
CoreWeave collapsed 45.6% this month.
Yields on CoreWeave’s 9% 2031 bond surged 255 bps to 11.47%.
Oracle CDS jumped 37 bps during November to 120 bps, with prices up 75 bps over three months.
After trading at 6.0% on October 3rd, yields on Oracle’s 5.95% 2055 bond jumped 45 bps to end November at 6.45%.
Bitcoin sank $18,700, or 17%, during November.
At November 21st lows, bitcoin was 26% lower m-t-d.
Bitcoin ended the month down 28% from the October 6th intraday high (126,273).
For the month, XRP was down 15%, Solana 26%, Binance Coin 26%, and Dogecoin 19%.
Ethereum sank 21% in November, with prices off 39% from August highs.
The late-month recovery somewhat stabilized trading dynamics, but the cryptocurrencies have suffered a serious round of deleveraging.
We can assume that huge amounts of leverage have accumulated in this highly speculative marketplace.
April’s “pause” rally triggered speculative blowoff dynamics throughout global markets, certainly including crypto.
I read with interest Bloomberg Intelligence analysis this week from James Seyffart, “Ethereum ETFs & Basis-Trade Impacts.”
A most abbreviated summary below:
“Hedge funds, the second-largest known holders of US spot Ethereum ETFs, likely contributed to the category’s $12.9 billion of inflows from April into October and the $2.5 billion of outflows since then via the Ether basis trade…
Though Bitcoin’s ETF’s absolute flows were larger (a $27.5bn inflow, followed by a $5.4bn outflow in the past seven weeks), the relative moves were much greater for Ether ETFs.
The group’s assets peaked at $32.2 billion in early October thanks to inflows and Ether’s rising price.
But they slid to less than $17 billion…
Ethereum ETFs flows this year have been impacted by changes in the yield from the Ethereum basis trade…
Hedge funds account for 38% of Ethereum ETF holders, widening their lead over the 25% share in Bitcoin ETFs…
Some hedge funds and other holders are almost certainly using the ETFs as the long leg of an Ethereum futures basis trade.”
According to Bloomberg, Bitcoin, Ethereum, XRP, Dogecoin, Solana, Cardano, Chainlink, and Stellar all now have futures contracts.
The iShares Bitcoin ETF ended the week with total assets around $70 billion.
There are now 12 separate Bitcoin ETFs, along with scores for other cryptocurrencies.
There are five XRP ETFs, with a dozen more coming.
The iShares Ethereum ETF has total assets of $11 billion.
How instrumental have levered basis trades become to the crypto universe?
Crypto at least made it through the week.
Fears of a more systemic liquidity issue escalated a week ago, as crypto deleveraging risked intensifying AI/tech de-risking/deleveraging.
Such fears triggered aggressive hedging, along with shorting throughout the hedge fund community.
And, of course, markets are conditioned to view such risk mitigation activities as yet another opportunity for a big short squeeze and unwind of hedges “buy the dip” payday.
Importantly, the global market liquidity backdrop has turned precariously unstable.
Crypto and AI/tech speculative Bubbles are at the precipice of a bout of risk aversion and destabilizing deleveraging.
Hedge funds, margin debt, option/derivatives, and the ETF complex create a fragile market structure.
Meanwhile, the general backdrop remains one of extreme global liquidity excess.
When big tech comes under pressure, fears of systemic de-risking/deleveraging quickly mount.
Hedging and shorting only exacerbate the risk of a major market downdraft, illiquidity, and dislocation.
But – and this is a big but – the now typical “risk on” short squeeze/hedge unwind rally provides a powerful punch to underlying global liquidity overabundance.
Heightened systemic risk associated with festering Credit issues and crypto and AI/tech deleveraging has pressured Treasury yields lower, as markets boost bets for more aggressive Fed rate cuts.
Right on cue, New York Fed President John Williams came out last Friday with dovish comments suggesting a probable December 10th rate cut.
The market ended this week pricing an 83% probability of a cut a week from Wednesday.
This is up from 29% on the 19th. Ten-year Treasury yields were down 12 bps in seven sessions (MBS yields 18bps lower).
Lower yields bolster “basis trade” and “carry trade” leverage, while squeeze/hedge unwind rallies stoke liquidity excess – creating a most unstable liquidity dynamic.
It’s worth noting that money market fund assets (MMFA) – my proxy for the expansion of “repo” securities finance - surged $46 billion the past week to a record $7.567 TN.
MMFA have ballooned $378 billion, or 19.5% annualized, over the past 14 weeks.
Emblematic of the historic inflation of speculative finance, MMFA inflated $2.951 TN, or 65%, in just over three years (since Oct. 26, ’22).
This is reflective of history’s greatest speculative Bubble and monetary inflation.
“Risk on” at this juncture is highly liquidity destabilizing.
Silver surged 13% this week to a record $56.50, boosting y-t-d gains to 96%.
Gold’s $174 (4.3%) jump to $4,239 pushed 2025 gains to 62%.
Platinum’s 9.9% rise boosted y-t-d gains to 84%, while Copper’s 3.5% increase raised the year’s advance to 31%.
The Bloomberg Commodities Index jumped 2.7% this week (up 11.8% y-t-d).
It’s not unreasonable for the bond market to dismiss such late-cycle speculative dynamics, though more steadfast risk embracement comes with clear inflationary ramifications.
High-yield CDS prices sank 19 bps this week to a one-month low of 322 bps – the largest weekly drop since late June (positive U.S./China trade developments).
High-yield spreads narrowed an astounding 32 bps to 269 bps, the biggest tightening since mid-May.
The 7.1 point drop in the VIX was the largest since the week of April 18th.
What to make of it all?
Well, such exaggerated moves are indicative of dysfunctional hedging markets.
In short, myriad hedging strategies are causing havoc and battering (hedge fund) performance.
Funds zigging and zagging.
Pablo Hernández de Cos served as the governor of the Bank of Spain (2018-2024), chairman of the Basel Committee on Banking Supervision, and economics professor, before becoming General Manager of the Bank of International Settlements this past July.
August 26 – Bloomberg (Mark Schroers):
“Central-bank independence is crucial for keeping inflation in check and contributing to people’s wellbeing, according to the new head of the Bank for International Settlements.
Autonomy allows policymakers to take decisions ‘based on economic considerations in the long-term public interest, free from short-term political interference,’ General Manager Pablo Hernandez de Cos said…
In his first speech since taking over, the former European Central Bank official stressed that independence also ‘shields central banks from pressures to use monetary policy to finance government budget deficits’.”
Hernández de Cos’ Thursday presentation at the London School of Economics, “Fiscal Threats in a Changing Global Financial System,” expands on critical analysis recently proffered by the BIS, Bank of England, and IMF.
Hopefully Fed officials are at least contemplating the subject matter.
I have extensively extracted from this important and timely must-read analysis:
“The main focus of my lecture is on the combination of high government debt levels and the growing presence of non-bank financial institutions (NBFIs) in sovereign bond markets.
This combination poses new financial stability challenges, which have both domestic and international components.”
“Two major changes have reshaped the global financial system since the Great Financial Crisis.
The focus of financial intermediation has shifted from lending to the private sector towards financing governments.
Partly as a result, NBFIs’ footprint in sovereign bond markets has grown considerably, facilitated by short-term funding markets that enable the build-up of leverage in the financial system.”
“Sovereign debt levels have increased considerably since the GFC.
They have now reached historical post-World War II highs in many advanced economies (AEs).
According to the IMF’s latest baseline projections, debt levels are projected to rise further, reaching an average of nearly 120% of GDP in AEs and 85% in emerging market economies (EMEs) as soon as 2030.”
“A significant risk for debt sustainability is that bond yields could rise further, especially if inflation were to flare up again or if governments delay tackling large fiscal deficits.”
“More broadly, the prevailing political process in many countries often results in deficit bias.”
“The surge in government debt levels has been accompanied by a major shift in intermediation patterns in the global financial system – away from banks towards NBFIs.”
“Leveraged NBFIs, and hedge funds in particular, have played an important role in filling the gap between the rapidly increasing supply of government bonds and the demand from banks and other NBFIs.
This has been primarily incentivised by hedge funds’ utilisation of relative value trading strategies, such as the cash-futures basis trade, that seek to exploit small price differences between related financial instruments.
To boost the returns on these small price differences, relative value hedge funds heavily leverage their positions.
They do so by borrowing in the repo market to finance the purchase of the cash security and profit from the small price difference between the security and its corresponding futures contract.
While these developments have been most notable in the United States, they have also taken place in several other major AE jurisdictions, including the euro area, Canada and the United Kingdom.”
“The greater presence of some NBFIs in sovereign bond markets increases the likelihood of sharp non-linear yield spikes (ie “snapback risk”).
More concretely, there are several channels through which NBFIs could generate and amplify stress in sovereign debt markets well before the theoretical limits implied by standard fiscal sustainability analyses are reached.”
“The first one is related to the role of duration matching by pension funds and insurance companies…
The second of those channels is linked to the way that many money market funds and open-ended funds use government bond holdings for liquidity management, which can lead to fire sales of those assets if there is a need to raise cash in response to a spike in redemptions.
The third stress amplification channel is related to ‘original sin redux’…
When foreign NBFIs hold bonds denominated in the local currency of the issuer, exchange rate movements generate (hard currency) valuation losses, which can trigger portfolio outflows, raising government bond yields.”
“Since the above channels are well known, I would like to focus today on a more novel set of potential financial stress amplification channels, related to some NBFIs’ heavy reliance on leverage and (on- and off-balance sheet) short-term dollar funding.”
“The first of these channels stems from hedge funds’ leveraged trading strategies, which are facilitated by the availability of repo financing on very favourable terms.
In recent years, hedge funds have been able to borrow amounts equal to or higher than the market value of the collateral provided – that is, without any discount, or haircut, protecting the cash lender from market risk.
Around 70% of bilateral repos taken out by hedge funds in US dollars and 50% in bilateral repos in euros are offered at zero haircut, meaning that creditors are not imposing any constraint on leverage using government bonds.
Larger hedge funds – those relative value funds typically involved in the basis trade – are especially prone to receive such favourable terms from their dealers relative to their smaller peers.”
“As a consequence, hedge funds’ relative value strategies are highly vulnerable to adverse shocks in funding, cash or derivatives markets, as evidenced by recent episodes.
During the market turmoil of March 2020, for instance, margin calls in Treasury futures markets triggered an unwinding of the trade, including holdings of Treasuries in the cash market, contributing to destabilising deleveraging spirals.
More recently, a more orderly unwinding of relative value trades – this time tied to interest rate swap markets, where investors had bet on a narrowing in spreads due to perceptions of potential regulatory loosening – seems to have contributed to the heightened volatility observed in Treasury markets in early April 2025.”
“The second novel financial stress amplification channel is linked to long-term private investors, such as asset managers, pension funds and insurance companies.
Despite not being highly leveraged, these internationally active financial intermediaries also face considerable short-term dollar funding rollover risks related to their use of FX derivatives.”
“The third novel financial stress amplification channel stems from the fact that the repo market and the FX swap market are closely linked to each other.
Major dealer banks are the key suppliers of short-term dollar funding in both markets.
And while FX swaps are off-balance sheet instruments that do not count towards total assets, both repos and FX swaps are forms of collateralised lending and count towards the risk budget of major dealer banks.
If stress in the repo market lowers banks’ risk-taking capacity or disrupts their funding, they are likely to pull back from the FX swap market.
Thus, stress in the repo market could quickly spread to the FX swap market, and vice versa.
Given the nature of the FX swaps, if banks do not roll over FX swaps, asset managers will have to come up with the full notional amounts of the underlying contracts in order to close them.
This could cause a global scramble for dollars, similar to what we saw in March 2020.
Thus, the traditional bank-sovereign nexus has now evolved into a broader nexus linking (bank and non-bank) financial institutions and sovereigns.”
“Limiting NBFI leverage when it gives rise to financial stability concerns should be a primary policy objective.”
Concluding comments:
“The global financial system has undergone profound structural changes since the GFC.
Against the backdrop of rapidly increasing government debt levels, the focus of financial intermediation has shifted from lending to the private sector towards financing governments.
This has been accompanied by a considerable rise in the presence of NBFIs in sovereign bond markets.
NBFIs’ growing footprint has been facilitated by short-term funding markets, which have enabled a significant build-up of leverage in the financial system.
These developments pose serious financial stability challenges, which have both domestic and international aspects.
In tranquil times, NBFIs’ greater presence in sovereign bond markets increases liquidity and lowers governments’ financing costs.
However, this greater presence also increases the likelihood of sharp non-linear sovereign yield spikes through a number of channels.
While some of those stress amplification channels are well known, three of them are more novel.
The first one stems from hedge funds’ leveraged trading strategies, which are facilitated by the availability of repo financing on very favourable terms.
The second is related to the fact that by using FX swaps (which tend to have very short maturities) to hedge currency risk, many real money NBFIs are also exposing themselves to rollover risk and funding squeezes.
The third novel channel stems from the close linkages between the repo market and the FX swap market, implying that stress in one can quickly spill over to the other.”
Hernández de Cos’ presentation includes charts that illuminate the momentous growth of hedge funds and NBFI (non-bank financial institutions) over recent years.
At a similar 150% of global GDP level in 2011, NBFI ended 2023 at 225% versus Banks’ 175%.
Since 2008, hedge funds have doubled to 8% of GDP.
Expanding rapidly since 2021, NFBI holdings of “advanced economies’ debt” surpassed 50% of GDP – compared to Bank and central bank holdings individually less than 20%.
Fueled by a surge in “other financial institutions” and “reporting dealers,” outstanding FX (foreign-exchange) swaps surged approximately 50% in three years to $130 TN.
Over this period, hedge fund sovereign debt exposures more than doubled to about $7 TN – with hedge fund “repo” borrowing almost tripling to surpass $3 TN and prime brokerage borrowings doubling to $3 TN.
In the section “Hedge Funds’ Growing Presence in Government Bonds Markets Outside the US,” a chart shows hedge fund electronic trading volumes in euro government bond markets almost doubling since 2020 to approach 60%.
From 2014, when all maturities (2, 5, 10 and 30-yr) saw less than 10% of Canadian government bond auction hedge fund allocations, by the end of 2024 allocations across maturities had jumped to between 40 and 50%.
On the subject of newfound hedge fund trading dominance, an interesting article this week from the FT:
“Voice Trading Makes a Comeback in $30tn Treasury Market - The Rise of Leveraged Hedge Fund Strategies Means More Trades Conducted by Phone or Messaging.”
November 25 – Financial Times (Joshua Franklin and Kate Duguid):
“The share of electronic trading in the nearly $30tn Treasury market has fallen to its lowest level in eight years, as exotic Wall Street bets on US debt push investors to make more trades manually.
Almost half of all trading in Treasuries this year has been done by one-to-one messaging or over the telephone in transactions too large and complex to be conducted without human involvement — the biggest share since 2017…
The comeback of so-called voice trading — which had been falling as a share of overall Treasury trading for decades — reflects the growing importance of what are known as package trades, often conducted by hedge funds.
‘The volume growth [in voice trading] is coming in large part from these large package trades that are executed manually,’ said Kevin McPartland, Coalition Greenwich’s head of market structure and technology research.”
Mentioned repeatedly: “basis trade.”
Those critters seem to be Everywhere.
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