When people start worrying about commodity traders in bear markets, the commodity traders themselves tend to reassure the market with comments like: “Ha! This clearly demonstrates you don’t understand our business at all. Lower commodity prices are GRRREAT for us. They liberate our balance sheet on a working capital basis and allow us to focus on our real value add, which is… spread trading.”
Though, if you’re Glencore, you tweak the comment so it goes something like:
“Prices are still not making sense where they are … it’s the funds driving it where it is today, not the actual demand,” Mr Glasenberg argued. “They believe demand for commodities is going to fall and continue to fall and that’s their view. Our view is what we see on the physical movement of commodities and it’s not too bad. We see the flows are still pretty strong.”
Here follows the second in a series of posts explaining why this week’s RMB depreciation is akin to the Great China Money Market fund breaking the buck.
But first a disclaimer! Whilst our analysis errs to the view that the depreciation was driven by market forces and thus inevitable, that’s not to suggest China “the market economy” is bust or about to face a hard landing. We’re very specifically talking about the state-managed part of the external capital account.
So, let’s continue from where we left off, namely, the point when the commodity super-cycle was sending the message that for China to have its rebalancing cake and eat it some major global restructuring probably would have to take place. Read more
When we bang on about there being a seismic shift going on in the world of commodity financing on account of the hypothetical eventuality of no more petrodollar or sweatdollar recycling, we too are talking about a negative feedback loop of worrying consequences for commodity/sweat-power producing emerging markets. Read more
Back in November we meandered through the possible implications of there being no more petrodollars in the system (on account of US shale oil energy liberation).
Since then, we’ve also been thinking about the possible implications of there being no more sweatdollars in the system (on account of US re-shoring and digital manufacturing trends).
So what happens if key dollar recycling pathways were to be significantly closed off or contracted?
Privately, we’ve speculated the situation could over time lead to the rise of a new international funding currency front runner. (Though, certainly not because the US is losing influence. More because, shale oil and a labour surplus means it may not be in America’s interest to defend reserve-currency status at all.) Read more
Here’s something that doesn’t happen every day.
The price of propane in Edmonton, Canada — home of Tar Sands production — is trading at a negative price. Read more
Some highlights from the FT Commodities Summit, which is taking place in Lausanne, Switzerland this Tuesday and Wednesday.
Oil production is becoming more of a manufacturing activity Read more
The FT’s Martin Wolf led a stellar panel on the global economy and the outlook for commodities featuring China expert Michael Pettis, BP’s group chief economist, Spencer Dale (formerly chief economist at the Bank of England), and Goldman’s chairman of global natural resources Brett Olsher.
As one might expect there was a difference of opinion on the panel about China’s future growth path. Goldman’s Olsher said he was confident that China would be able to maintain 6.5 per cent to 7 per cent growth in the near term, whereas Pettis suggested that even 3-4 per cent should be considered a successful adjustment. Read more
FT Alphaville is in Lausanne, Switzerland, for this year’s Commodities Summit. The conference is taking place at the Beau Rivage — a hotel so good that John Oliver has even expressed a desire to have intimate relations with it — and the opening keynote from Ning Gaoning, chairman of China National Cereals, Oils and Foodstuffs Corporation (COFCO) is about to begin.
Here are some scene setter pics: Read more
Ever wonder what the collapse of a commodity means for the hegemonic order that controls access to it?
Look no further than the sugar trade of the 1800s.
A new paper by Christian Dippel, Avner Greif, Daniel Trefler entitled The rents from trade and coercive institutions: removing the sugar coating examines the effect of the sugar price collapse on wages and incarceration rates in colonies established for sugar cane cultivation. Read more
As Paul Krugman always likes to recount, strange things happen at the zero bound. Macroeconomics gets weird. Liquidity traps prevail. And a whole slew of paradoxes come into being.
And that’s largely because below the zero bound things get even stranger still.
What you think should happen, doesn’t, and what you think definitely won’t happen, does. Furthermore, negative interest rates don’t just kill off the traditional point of banking, they encourage bad incentives and dubious market practices for all purveyors of capital. Read more
A few weeks ago, Michael Masters, of the eponymous US investment firm, made the point to FT Alphaville that bad things can happen whenever investors mistake the fruits of production for the means of production, and apply long-standing “long only” strategies (more suited to equity index markets) to assets like commodities.
Earlier this month, Nomura put out a note that observed much the same point.
Specifically, they argued that commodities should be treated like currencies and valued with macro-trading tools that incorporate the concepts of carry, value and momentum. Read more
One for the FT Alphaville historical log.
The CME announced on Wednesday that it would be closing most open outcry futures trading pits in Chicago and New York as of July. Only options on futures contracts and S&P 500 futures pits are to remain open.
That makes it a sad day for anyone who was inspired to become a futures operator because of, you know, that film.
It also contrasts with the LME’s decision to bring their open-outcry ring trading practices (along with their red benches) with them to their new corporate location in Finsbury Square.
Most importantly, however, it marks the end of a visual indicator for how the market is really trading, or any insight into “mood”. Once all contracts transact in the digital ether, all panics will be resigned to pixelated flash crash form visible only on screens or broker terminals. Gone forever will be the distressed pit trader photos. Read more
We’re all about unexpected consequences of “liquidity illusion-syndrome” these days, so it was exciting to discover a liquidity-focused assertion from Citi’s Edward Morse and team on Monday about the recent oil price decline, one that ties together a few ideas about how commodity markets relate to bank intermediation.
As a reminder, we have postulated that much of the decline is less related to sudden spot imbalances as it is to the curve’s “definancialisation”. The connection Citi has now made is between the commodity sell-off and regulatory burdens placed on banks’ commodity operations.
It adds to a discussion developed in an April paper by David Bicchetti and Nicolas Maystre, which questioned whether the recent correlation reversal in commodities was indeed connected to the closure of banks’ commodity departments. Read more
Here’s a great chart from Emad Mostaque, a strategist at Ecstrat, a new research company set up by Mostaque and former head of EM strategy at Deutsche Bank John-Paul Smith:
Credit Suisse has a new report out on the winners and losers of the recent rout in global natural resource prices. While everyone has been paying attention to the remarkable decline in the value of oil, agricultural commodities and industrial metals have also become a lot cheaper recently:
We’ve long reported about China’s amazing commodity collateral shenanigans, featuring almost every commodity or physical good under the sun.
None of which was a problem for the financing side of the equation as long as the deals could be rolled over and for as long as the collateral did not have to be liquidated.
A few bad loans later, however, and suddenly the need to check in on the underlying collateral has exposed a small problem with relying on commodity collateral to de-risk trade finance. So intense was the demand for cash financing in China that it seems the greatest shenanigan of all was rehypothecation — multiple use of the same collateral many times over for many different loans. Read more
Craig Pirrong’s white paper on the economics of commodity trading firms (CFTs), sponsored by Trafigura, has been released and can be found here.
Overall conclusion: commodity trading firms are not systemically risky because they do not engage in the sort of maturity transformation that banks do. They also tend mostly to operate on a hedged basis, via “basis trade” exposure. Short-term assets meanwhile are funded with short-term debt while long-term assets are funded with long-term debt, meaning the institutions are not heavily leveraged at all, though balance sheets are exposed to liquidity or rollover risk. Read more
Banks are selling off their commodity divisions for regulatory reasons but also because commodities are turning out to be less profitable for them than they used to be.
On which note, an interesting development has emerged since banks started winding down their commodity divisions in 2013. According to David Bicchetti and Nicolas Maystre, who wrote a paper in 2012 highlighting increasing correlations between a number of major commodities and indices from 2008 onward, these correlations have now begun to dissipate. Read more
There’s a familiar name on the latest Specially Designated Nationals List in the US sanctions against Russia…
TIMCHENKO, Gennady (a.k.a. TIMCHENKO, Gennadiy Nikolayevich; a.k.a. TIMCHENKO, Gennady Nikolayevich; a.k.a. TIMTCHENKO, Guennadi), Geneva, Switzerland; DOB 09 Nov 1952; POB Leninakan, Armenia; alt. POB Gyumri, Armenia; nationality Finland; alt. nationality Russia; alt. nationality Armenia (individual) [UKRAINE2]… Read more
Magic mirror on the wall, where’s the fairest value for commodities overall?
Or, as BoAML notes on Thursday:
Commodities may be soft in USD terms, but for anyone living in South Africa or Turkey they are back to the record highs of the ominous summer of 2008 (Chart of the Day). In contrast, in PLN and RUB they are as low as they have not been since 2010. This divergence will have a significant impact on growth and inflation in 2014: weak pricing power means that higher commodity prices act as a tax on demand, slowing down growth and thus ultimately reigning in current account deficits and inflation. For now, markets focus primarily on the short-term inflation uplift, but we believe FX pass-through will prove self-deflating, and rebalancing will materialize.
Over the new year the New York Times published a scathing attack on Professor Scott H. Irwin of the University of Illinois and Professor Craig Pirrong, of the University of Houston, in which author David Kocieniewski argued the professors were shills for the industries they covered.
Kocieniewski’s case against Pirrong was that he had defended and still defends speculation in commodity markets whilst working as a consultant for the Chicago Mercantile Exchange, Trafigura, the Royal Bank of Scotland, and other market players.
His issue with Irwin was his position as a defender of speculation in agricultural markets, whilst consulting for a business that serves hedge funds, investment banks and other commodities speculators. Read more
Here’s a crazy thought to start the New Year year with. What if virtual currencies were born less of an organic anti-government peoples’ movement and more of extreme unconventional monetary policy by the state? The ultimate central bank Jedi mind trick if you will, which takes easing to levels that conventional policy just cannot go.
But even if it’s not a plan hatched directly by monetary bodies to serve the interests of the state, there’s still a strong argument to be made that virtual currencies could be doing the Fed, the BoE and even the ECB a big favour. Read more
It has been a year to jump on a bandwagon sailing with the wind at the heart of the pack. Momentum, baby.
Let Citi paint you a picture: Read more
This guest post is from Mark Haefele, Global Head of Investment at UBS Wealth Management, and his colleague Chris Wright, Cross-Asset Strategist.
A key rule in financial markets is that rational investors should not take unnecessary risks. It is strange, then, that some savvy investors still allocate to commodities over a long-term, five-year-plus horizon. The assumption is that commodities diversify portfolios, hedge against inflation, and, in the case of gold, offer a safe store of value. But our research suggests these justifications for long-term bets on commodities are illusory. Read more
We’ve argued before that the 2005-2007 commodity bull-run could have been the product of an unwitting self-manufactured squeeze, as the industry rushed to monetise as much inventory as possible to benefit from higher than usual interest rates and as inventory levels dropped. (All pretty much unwittingly, of course.)
As prices increased, the economy choked. Read more
Take yourself back to the heady oil price days of early 2008. Imagine a rogue voice reassuring the market to “fear not, one day soon the US will be saturated in the black oozey stuff”.
What would the market have made of such a concept? Would such a voice have been dismissed as a loon? Very possibly.
And yet, less than six years later comes the following warning from Goldman Sachs: Read more
Here’s an unintended consequence of the government shutdown that the Republicans may not have envisioned: commodity market turmoil.
John Kemp of Reuters makes the excellent point on Wednesday that the shutdown, if it continues, will soon hit important government data statistics services such as the CFTC’s weekly commitments of traders report and even potentially the EIA’s weekly inventory figures. Read more
In the summer, FT Alphaville attended a retreat organised by fin-tech investor Sean Park, who heads up the venture firm Anthemis. The event introduced us to a number of Anthemis’ portfolio and partner companies, all of whom were somehow connected to disruptive trends in finance.
Among them was a company called Trōv. Read more
A very intriguing little exclusive from Reuters on Friday:
(Reuters) – China is developing a new trading platform to enable banks to sell off loans to a wider range of investors, in a move that could pave the way for a government bailout of lenders or distressed asset sales to private investors. Read more