Commodity Chaos – While Equity Markets Calm

Commodity Chaos – While Equity Markets Calm
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“The breath taking rise of commodities is causing a whirlwind of anxiety on financial markets and exchanges, as traders speculate about the knock on effects of the Ukraine conflict. Nickel prices seriously hit nerves today, with trading suspended on the London Metal Exchange, after a record breaking spike in prices. The three month contract crossed the $100,000-a-tonne mark for the first time ever, doubling in value in just hours. The huge volatility and rapid moves in price during trading in Asia prompted the drastic decision. It seems the meme stock frenzy has now metamorphosed into commodity chaos, as traders have scrambled to try and cover short positions. Those that had bet against the metal’s rise in value, have now been forced to buy at a much higher price, creating a short squeeze. It’s likely a big margin call prompted the suspension of trading, with sharp gains forcing speculators to scramble for additional capital to put into accounts to cover the shortfall.

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Q4 2021 hedge fund letters, conferences and more

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Commodity Chaos

Although the brakes have been put on sanctioning Russian commodities exports, already supplies are disrupted as shipping companies avoid ports in the region and metals companies start to reduce their exposure to Russia.  Germany has cautioned that stopping energy supplies from Russia would put Europe’s energy security at risk, but the option is still very much on the US table, and this nervousness is keeping Brent crude elevated above $126 a barrel.

Hopes that European countries will be given financial breathing space through a huge joint bond issue helped bring a sense of calm to equity markets in early trading in Europe. There are reports EU officials are working on the detail of an effort to raise funds through selling government debt to help pay for a big boost to defence and energy spending.

Faced with the prospect of Russia turning its energy supplies into a weapon by turning off the taps, there is recognition that fast action is needed to build up alternative sources. Weaning the bloc off a reliance on Russian energy supplies won’t be easy, nor will it come cheap. Seriously bolstering coffers will be needed to fund this acceleration into renewables and the infrastructure needed to take liquefied natural gas from other exporters. Insurers, engineering giants and banks are among the risers on European indices as investors digest the implications that a jolt of extra financial firepower would have for European economies.

With events moving so rapidly, it’s tempting to try and second guess market movements. But investors should try and hold their nerve and look beyond short term events and focus on their long-term goals.  Riding out the storm is almost always a good strategy when things start to get rocky. This is the time when the priority should be ensuring they have a diversified portfolio with a wide range of investments across different sectors and geographies.”

Article by Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown

Updated on Mar 8, 2022, 3:42 pm

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