Commodity markets should be tracked for potential macroeconomic risks, Dallas Federal Reserve analysts said in the latest sign that liquidity concerns in the sector have caught the eye of central banks and regulators.
“Ongoing developments in commodities should be monitored for potential impacts on financial conditions broadly,” said the note from Dallas Fed economists, including Jill Cetina, who leads surveillance and supervisory risk analysis.
The commodities industry has long operated under the radar of regulators, but the clamber to restrict trade with Russia following its invasion of Ukraine is highlighting the role of trading companies as takers of market risk and intermediaries for global consumption.
“The threshold for central bank intervention in unregulated markets is high,” the economists said. “It would be prudent for firms active in commodities markets to proactively assess and further strengthen their liquidity profiles.”
The Bloomberg Commodity Spot Index reached a record in March as part of a 32 percent increase so far this year. Traders are taking steps to minimize the stresses of high and volatile prices: adding billions of dollars in credit, using options markets to hedge against increased margin requirements and reducing exposure to deals.
“While so far, commodity trading firms appear to have obtained the credit necessary to continue their intermediation activities, the recent situation highlights some vulnerabilities,” the economists said. “A pullback in credit to a few commodity trading firms could leave remaining ones unable to meet demand for commodity intermediation, potentially creating a negative feedback loop that causes commodity prices to rise further.”
Incidents such as the collapse of nickel trading on the London Metal Exchange are “evidence of risk management weakness,” the economists said.
UKRAINIAN CROPS
The outlook for spring planting in much of Ukraine has improved as Russian troops narrow their offensive to focus on eastern areas.
The Ukrainian government yesterday said it expects a 17 percent decline in planted area from last year, versus the 20 percent drop it forecast early this month.
METALS
Gold for June delivery on Thursday fell US$9.80 to US$1,974.90 an ounce, up 1.5 percent for the week.
Silver for May delivery fell US$0.33 to US$25.70, up 3.5 percent weekly, and May copper rose US$0.01 cent to US$4.72 a pound, little changed from last week’s US$4.73 a pound.
Additional reporting by AP
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