After two days of global market crashes, the sound of a margin call rang out!

Due to the escalation of trade tensions, global markets suffered heavy losses in the past two days (Thursday and Friday), triggering the most severe margin calls from hedge funds since the beginning of the COVID-19 pandemic in 2020. The rapid decline in asset values forced banks to require customers to increase collateral, with the scale and market volatility comparable to the crisis four years ago. In the market turmoil, US stocks recorded their worst performance in a single week since 2020, and oil and high-risk bonds were also sold off. Hedge funds suffered heavy losses, not only experiencing their worst single day performance (since records began in 2016), but also selling at historically high levels, leading to leverage ratios dropping to an 18-month low. Unusually, even safe-haven asset gold was not spared, notably falling on Friday. Analysts believe that this may reflect some investors being forced to sell gold to meet urgent margin requirements, highlighting the severity of current market pressures. Trump's tariffs trigger global market crisis The market storm began with the tariff declarations from the Trump administration, rapid responses from related countries, and potential retaliatory actions, further exacerbating market tensions and leading to a "widespread collapse" in the global financial markets. Market indicators clearly reflect this turmoil: the S&P 500 index on Wall Street is experiencing its worst week since 2020, while oil and high-risk corporate bonds are also facing substantial sell-offs in sync. An experienced senior broker pointed out that a significant feature of this market turmoil is the "broad decline across asset classes", with no major assets such as interest rates, stocks, and oil spared, reminding people of the market turmoil at the beginning of the COVID-19 pandemic in 2020. Banks take urgent action: Margin call notices pour in The sharp decline in global markets directly eroded the value of assets held by hedge funds through bank loans. As a chain reaction, Wall Street banks were reported to have quickly taken action, demanding their hedge fund clients to provide additional cash or securities as additional collateral for loans issuing margin call notices. The scale of margin calls issued by several major banks in this instance is believed to be the highest since the beginning of the pandemic in early 2020. The banking industry's risk control nerves are therefore taut. Media reported that teams at Wall Street brokerage firms serving hedge funds were already in work mode early on Friday, holding emergency meetings with an "all-hands-on-deck" approach to prepare for anticipated large-scale margin calls. An executive at another major US bank's brokerage firm also confirmed to the media: "We are proactively contacting clients to fully assess the risk exposures of their overall investment portfolios." Hedge funds under pressure: Intensifying sell-offs and leveraged deleveraging In this sudden market turmoil, hedge funds, which often operate with high leverage, became directly pressured. According to the latest weekly report from the prime brokerage department of banking giant Morgan Stanley, this past Thursday was the worst day recorded since the bank began tracking data for "long/short equity funds" in the US in 2016, with an average drop of up to 2.6%. The report further revealed that on Thursday, the selling behavior of hedge funds in the stock market reached an astonishing scale, "on par with the highest levels on record." The intensity of the sell-off was enough to rival the peak during the 2023 US regional bank crisis and the panic selling triggered by the COVID-19 pandemic in 2020. Data also showed that this round of sell-offs was particularly concentrated in several previously popular areas, including large tech stocks, software and semiconductor companies related to artificial intelligence (AI), high-end consumer sectors, and investment bank stocks. The large-scale selling (partly due to forced liquidation pressure) directly triggered a rapid deleveraging process in the hedge fund industry. Morgan Stanley's report indicated that the net leverage ratio of US long/short equity funds a key indicator measuring the funds' use of borrowed funds to amplify investment positions has plunged to about 42%, the lowest level in the past 18 months. However, not all funds were impacted equally. The report also mentioned that some hedge funds may have forecasted the risks of escalating trade tensions in recent weeks and taken pre-emptive actions (including reducing equity positions and leveraging levels), resulting in relatively less "pain" during this market downturn. Anomaly revealed: Safe-haven gold also sold off Gold, usually sought after in times of market turmoil and increased risk aversion, displayed an unusual trend this time. Despite global investors trending towards pessimism, the international gold price unexpectedly fell by 2.9% on Friday. Suki Cooper, a precious metals analyst at Standard Chartered Bank, provided a possible explanation for this phenomenon. She believed that gold, often seen as a safe haven asset, might be used by some investors facing liquidity pressures to "meet the demands of additional margin calls" during the turmoil. This means that, to raise cash to address margin calls, some funds or investors may be forced to sell liquid assets, including gold. This detail indirectly confirms the widespread and severe nature of current market pressures. This article is sourced from Wall Street Seen, written by Gao Zhimou; GMTEight edited by Liu Jiayin.