Premarket Actions: Broken Nickel Market a Warning to Wall Street

A version of this story first appeared in CNN Business’s Before the Bell newsletter. Not a subscriber? you can register right here. You can listen to an audio version of the newsletter by clicking on the same link.

CNN Business

After a one-week break, investors can trade nickel again on the London Metal Exchange. But the market remains extremely volatile and flawed, in a sign of how Russia’s war in Ukraine continues to shake the global financial system in unexpected ways.

What’s happening: The LME expected to return to normal on Wednesday. But it had to suspend electronic nickel trading shortly after it resumed due to a technical problem.

Darwei Kung, a portfolio manager at DWS, said his team attempted to execute trades at 4 am ET. “That lasted two minutes,” or less, he told me.

On Thursday, the price of the metal fell to $41,495 a metric ton, its daily limit, as traders rushed to sell shortly after the market opened.

A step back: Trade in many commodities, including other metals, agricultural products such as wheat and energy, has been turbulent since the pandemic disrupted supply chains.

But the invasion of Ukraine, a major exporter of wheat and corn, and subsequent sanctions on Russia, a major exporter of oil, gas, nickel, aluminum and palladium, have made matters worse. Traders are struggling to determine if there will be a shortage, which will cause big price movements.

“Clearly, it looks like some of these markets are broken,” Warren Patterson, ING’s chief commodity strategist, told me.

The problems have been more extreme in the nickel market. The LME had to stop trading for the first time since 1988 last week after prices doubled in just a few hours. The roots of the chaos go back to Xiang Guangda, whose company, Tsingshan Holding Group, made big bets that the price of nickel would fall. The gamble fell through after the invasion sent metals skyrocketing.

But there are also signs of strain elsewhere. Patterson said the number of traders betting on oil has plummeted as people wait on the sidelines for a break in volatility.

Futures for Brent crude, the benchmark for global crude, surged above $139 a barrel after the invasion and then fell nearly 30% a week later.

Why It Matters: When traders pull out of the market because they think conditions are too murky and money dries up, it only sets the stage for bigger swings as there are fewer potential buyers and sellers.

“[It’s] a vicious cycle,” Patterson said.

Those changes can make it difficult for the market to function properly. Traders may receive “margin calls” from their brokers or other market players, asking them to insure themselves against increasing losses by shelling out more money. If they don’t have the cash, the situation can quickly deteriorate, triggering a chain of unexpected consequences.

The European Federation of Energy Traders, a trade group whose members include BP (BP) and Trafigura, recently warned governments and central banks that the market needed emergency support in the face of historic volatility. They said there was a “significant risk” that traders would not have the money to deal with margin calls, which could cause major instability.

“It is not unfeasible to envision a situation in which generally strong and healthy energy companies, with significant and valuable asset portfolios, are unable to access cash to meet these unprecedented margin requirements,” they wrote in a letter dated 8 of March.

The Federal Reserve slashed interest rates at the start of the pandemic. Now, for the first time since 2018, it is starting to raise them again, in a bid to cap the highest inflation in decades.

The latest: The Fed raised its benchmark interest rate by a quarter percentage point on Wednesday and signaled it was prepared to aggressively back away from supporting the economy during the crisis, if necessary. Officials forecast six additional hikes this year.

“We think the economy is very strong and will be able to withstand tighter monetary policy,” Fed Chairman Jerome Powell told reporters after the announcement.

Stocks rose after the news, although US futures fell on Thursday morning. The S&P 500 rose 2.2% on Wednesday, while the tech-heavy Nasdaq Composite jumped 3.8%.

Investors were encouraged by the Fed’s emphasis that its next steps will depend on the latest economic data. Fears have mounted that if the Fed withdraws stimulus too quickly, it could tip the economy into a recession.

Stocks in mainland China and Hong Kong, which took a hit earlier this week, continued to rally after Beijing pledged to support the market and prop up the country’s economy.

Hong Kong’s Hang Seng rallied 7%. The Shanghai Composite gained 1.4%. Tech giant Alibaba, facing heavy selling pressure, is up 43% in the last two trading sessions.

There’s more: The Bank of England, which is a few steps ahead of the Federal Reserve, on Thursday pushed its main interest rate back to its pre-pandemic level.

Russia says it has ordered the $117 million in interest payments it owed on Wednesday to be sent to investors, in a bid to avoid its first international default in more than a century. But it’s not out of the woods yet, reports my CNN Business colleague David Goldman.

That’s because the funds the country used to make debt payments came from Russia’s frozen foreign assets sanctioned for its invasion of Ukraine, so it’s unclear whether investors will get their money.

Anton Siluanov, Russia’s finance minister, told Russia Today state media that the country had met its obligations to creditors.

But the “possibility or impossibility of fulfilling our obligations in foreign currency does not depend on us,” Siluanov said, according to RT, warning that the payment could not be made if the United States rejects it.

“We have the money, we made the payment, now the ball is in America’s court,” he said.

A Treasury spokesman said the United States would allow the payments to go ahead.

That said: more payments are due soon, some much, much larger. And if Russia tries to pay in rubles, not dollars, that would constitute a default, according to Fitch Ratings.

If the Russian government defaults on its foreign obligations for the first time since the Bolshevik revolution, it will spark a fight over which investors lent money to Moscow and whether their potential losses could reverberate in financial markets.

US housing starts and building permits for February, as well as initial jobless claims from last week, are released at 8:30 am ET.

Add Comment