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nickel market pushed to the breaking point

by WOOWinvest
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nickel market pushed to the breaking point


Russian stock market closed. Gasoline prices soar, but America won’t buy cheap Russian oil. The nickel market stopped trading for a week in an attempt to restart, then stopped almost immediately.

Why it matters: Sanctions, government action and marked price volatility are shaking our once unshakable reliance on rational markets as the backbone of the world economy.

The latest: The 145-year-old London Metal Exchange (LME) reopened nickel trading yesterday after a week-long freeze – only to close the market again within minutes due to technical issues.

Backstory: The initial nickel market shutdown followed an extraordinary short squeeze that sent prices up more than 250% in a little over 24 hours, culminating above $100,000 per metric ton on March 8.

If the LME basically doesn’t say “oh, it’s okay” and cancel the offending transaction. Bloomberg elaborates on the confusion here. Some people might get some good results in these trades, but they’re not happy.

What they’re saying: “It is inexcusable for the LME to cancel the nickel transaction between willing buyers and sellers. Inexcusable,” metals trader Mark Thompson wrote on Twitter.

The big picture: In the decades following the fall of communism, the global economy was organized on the idea that financial markets were reliable and accurate mechanisms for measuring and managing the various risks faced by companies, investors, and the world.

These ideas are partly rooted in the so-called efficient markets hypothesis, the quasi-mystical but highly influential idea that market prices accurately reflect “all known information.” Many then made the leap that the market always identified the “correct” price in a sense.

Others, however, argue that markets cannot integrate all known information—because sometimes people with good information cannot participate. This idea is known as the “arbitrage limit.”

The financial world is now facing some serious constraints on arbitrage.

Matt’s Thought Bubble: I’m not a hedge fund genius, but it seems like a good bet that the Russian stock market might fall as the West has already hit the country economically with sanctions. Some may want to short the Russian market!

Well, they can’t. Almost as soon as the tanks started rumbling towards Kyiv, such bets on falling stock prices were banned in Russia. If that was enough, the entire market shut down shortly after the short-selling ban. The Russian market has been closed since February 25th.

Well, what about Russian oil? It is clearly undervalued as it trades at an unprecedented $30 below other global oil benchmarks. Buying it seems like a good deal!

Besides the sanctions mean that no reputable US broker will allow anyone to make such trades. (That’s why it’s cheap, by the way.)

The status quo: When the LME reopened for nickel trading yesterday morning, there were clearly many who thought the absurdly high nickel prices were unsustainable. They want to sell.

As a result, prices plummeted so quickly that some trades exceeded the exchange’s new limit of 5% daily price movement — forcing it to suspend trading again. (You can execute trades in Communist China, the bastion of market freedom on the Shanghai Futures Exchange, though.) The LME was finally able to resume trading at around 2pm yesterday, but had to stop again this morning.

Bottom line: Markets are human institutions. When events get as wild as they are now, the illusion of the market as a system completely independent of larger geopolitics or more secular politics of any institution (like metal exchanges) suddenly fades away.

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