The recent volatility in global financial markets hit the commodities sector hard on Monday, as hedge funds and other investors scurried to reduce their risky investments.
Nickel prices tumbled 5 per cent, while copper and zinc fell almost 3 per cent and gold prices traded at levels more than 7 per cent lower than before the start of last week’s market turmoil.
This decline in commodity prices is – like the other recent swing in equity markets – still relatively modest compared with the movements seen in market crises during recent decades.
However, the movements follow a period when markets have been extremely calm – meaning that investors are now being forced to reassess the low volatility strategies.
This repositioning is prompting some unusual price swings and heavy trading flows, particularly in sectors that have been the focus of risk-taking over the past year, such as credit derivatives, emerging markets and commodities.
“I don’t think anything has fundamentally changed for commodity markets. I think it is just a case of investors selling their holdings to pay for losses they may have incurred elsewhere,” said Kevin Norrish, commodities analyst at Barclays Capital.
An adviser to a London-based fund of hedge funds added: “The big theme of the moment is deleveraging and derisking.”
One sign of this process on Monday emerged in the foreign exchange markets, where investors have been reducing their use of the so-called “yen carry trade” – the practice of borrowing cheaply in yen to fund investments in higher-yielding currencies. This on Monday pushed the yen to a three-month high of Y115.16 against the dollar, while it also rose to a peak of Y150.84 against the euro, its highest level since late November.
Meanwhile, the cost of insuring against a rise in the yen against the dollar using derivatives has soared by 26 per cent since last Tuesday to its highest level since August. This could prompt even more unwinding of the carry trade in the coming days.
Separately, emerging market equity prices continued to suffer as investors withdrew from their risky bets. Meanwhile, the cost of insuring against the default of a basket of risky corporate bonds using derivatives rose to trade at levels that are almost 50 per cent higher than a week ago.
Louise Purtle, analyst at CreditSights, said: “The era of ravenous risk appetite that was fuelled by excess liquidity and appreciating asset prices [has come] to an abrupt end.”
However, Edgar Meister, the Bundesbank board member in charge of financial stability, told FT Deutschland that he was confident that financial institutions, including hedge funds, could cope with the slump. “There is no reason to panic at this stage. What we observe is a healthy correction.”
This is echoed by many analysts and traders, who pointed out there were signs of stability returning to some equity markets on Monday.
With additional reporting by Rachel Morarjee, Peter Garnham and Mark Schieritz
