21.11.25 - Stress test - deleveraging

The market is entering its first meaningful stress test of this cycle, driven by a broad deleveraging wave. The initial trigger came from the crypto space, where prices have fallen sharply in recent days. With highly leveraged positions under pressure, the forced unwinding is now spilling over into equities. Speculators and leveraged investors are being pushed to cut exposure quickly to meet tightening margin requirements.

Yesterday’s market reversal was sparked by a shift in rate expectations. With the US Bureau of Labor Statistics unable to publish the October and November jobs data before the December FOMC meeting due to the government shutdown, the Fed is flying partially blind. The assumption now is that the Fed will not cut rates in December. Investors had priced in a 25 bps cut. This is now being erased, prompting a swift market re-pricing.

Markets: global unwinding process

• US futures lower in early trading

• Bonds: yields fall globally with the US 10-year yield dropping to 4.06% as safe haven demand accelerates

• Gold: down almost 1% trading at USD 4’040/oz - together with falling commodity prices

• USD: unchanged

• CHF: slightly stronger

• Cryptos: tumble with Bitcoin close to USD 81k

• Volatility: VIX rises over 27, signaling some fear

My View: Forced deleveraging is now the dominant driver and it can accelerate quickly.

This is exactly the type of environment I anticipated and positioned the portfolio for over the past months. You can never predict the exact day when the unwind begins, only that it will happen once, and most of the time, the leverage reaches stretched levels and catalysts emerge.

The next phase depends on how aggressively leveraged positions are liquidated. This process can intensify into a wash-out scenario, where selling becomes indiscriminate across assets. If such a phase unfolds, it would open the window to start acting on the opportunity list: gradually covering short positions and selectively buying equities that have moved onto attractive valuation levels.

For now, this requires close monitoring on an hourly and daily basis. The unwind has started, its magnitude and duration will define the next major setup.

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