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Biggest commodities markets are starting to seize up
Don't worry -- governments and central banks will always be ready to short the monetary metals.
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By Alex Longley
Bloomberg News
via Crain's Chicago Business
Friday, March 18, 2022
It's getting harder to deal in some of the world's most important commodities as everything from geopolitical turmoil to exchange snafus prompt traders to rush for the exits, rapidly draining liquidity.
Prices of materials like crude, gas, wheat and metals have become alarmingly erratic as a gulf emerges between buyers and sellers who are facing big financing strains. Markets have been roiled on fears about Russia's invasion of Ukraine constraining commodities flows, though in many cases rallies were quickly followed by a drop in prices.
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The London Metal Exchange's embarrassing weeklong suspension of nickel trading is an example of a market grinding to a halt after extreme price moves. Liquidity is nonexistent as some dealers try to close positions amid a glitchy reopening of trade in the critical metal.
The volatility is particularly difficult to navigate because some moves appear to defy fundamentals, with hedge funds exiting long-term bullish bets just as supply looks the tightest in years. Merchants are finding it harder to snap up any cheap cargoes because of huge margin calls and credit line caps.
"Volatility as an asset class is enormous now, and on top of that you have some serious operational issues," said Ilia Bouchouev, a Pentathlon Investments partner and adjunct professor at New York University. "It's a vicious loop where volatility forces companies to reduce positions, which means what's left in the market is forced trading. That in turn contributes to even more volatility."
Ructions from the Ukraine war have been compounded by a historic nickel short squeeze. The LME suspended trading as prices surged 250% to a record, canceling almost $4 billion of transactions.
That caused uproar among investors who stood to profit from bullish bets prior to last week's closure -- and snags with the reopening have hardly improved the mood. Many previously bullish investors are now in a long queue of sellers enduring sharp price drops while they wait for buyers.
By late Thursday, almost $3.3 billion of nickel was on offer at the limit-down price, but there wasn't a single bid on the LME's order book. Just two trades took place that day in the electronic market. The illiquidity is a worry for consumers who use nickel in stainless steel and electric-vehicle batteries. ...
... For the remainder of the report:
https://www.chicagobusiness.com/economy/commodities-markets-hit-geopolitical-turmoil-exchange-snafus
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