Futures market price controls and the physical gold rush
The situation in China has worsened significantly in recent days. The US Financial Market Supervisory Authority (SEC) threatened to delist 5 Chinese technology companies from the US market, causing a wave of panic in Chinese stocks listed in New York: some flagship stocks lost more than 10% in one day, the strongest correction in the Chinese technology sector since 2008. This sharp market correction is on the back of bond selling by foreign funds in China. Bloomberg indicates that sales of Chinese bonds by foreign funds are at a record pace since the last financial crisis: More than 5 billion Chinese bonds were sold in one month.
The Chinese real estate sector continues to worry observers. The contagion of credit risk is now spreading to even the most hardened players who have seen their credit ratings drop to the “junk” category, and this in just a few weeks.
These financial shocks come as a new wave of Omicron variants forces China to impose total control over various regions. Fears of countrywide paralysis are now mentioned. This situation creates an additional risk in a production chain already affected by the health crisis.
The CSI Hong Kong index is trying to rebound after a bigger drop than observed in 2020 following the emergence of Covid in China.
This plunge into the Chinese market prompted the authorities to intervene desperately, squeeze the shorts HSTECH index history of tech stocks in an unprecedented oversold configuration since 2008. This Wednesday, March 16, the Chinese State Council promises to intervene on all fronts at the same time: real estate market, equity foreign exchange, regulation of technological stocks, dialogue with American authorities…
Against this backdrop, the Fed’s decision to raise rates by 0.25% on Wednesday offers hope for a move Chinese-American Concerted efforts to fight inflation. Excitement is now focused on the level of supply available. The Fed alone is ineffective in this area. Raising rates, even aggressively, is no longer enough. Cooperation between the two countries is essential in solving the problem of bottlenecks in the supply chain.
Without concrete results of this cooperation, the new Chinese risk could be serious effect Growth potential of the US technology sector.
Earlier in the week, the NASDAQ index officially entered bear market territory. Just one image adds to the end-game vibe for US tech stocks Microsoft stock just drew a “death cross.” daily (crosses SMA 200 and SMA 50). This is the clearest bearish signal since the turn of the century for its symbolic value Nasdaq.
Coordinated intervention to protect the entire technology sector needs to happen here and now. We can expect new proposals for direct intervention to protect this sector, which is essential to American growth.
This decline in technology stocks is also fueled by a decline in real equity returns, which are currently reaching unprecedented negative values.
Inflation is destroying stock returns. This is even more true in Europe, where we are witnessing massive releases in its portfolio equity.
Economic activity is certainly recovering rapidly, but it is largely insufficient compared to the inflationary shocks observed on the continent. The price paid by producers in Italy reached the astonishing figure of +41.8% in annual change and +8% in monthly change!
The shock coincided with price increases paid by producers before the start of the conflict in Ukraine. It remains to be seen how this staggering rise in inflation will spill over into the consumer price index.
Lately we have been noticing political willreduce shock Europe. The war in Ukraine isn’t going to fix things, but it’s a barely disguised attempt to control the contagion of these bad PPI figures on the CPI, to make it bear full responsibility for the price hikes paid by producers that started earlier. Other initiatives can be taken to avoid excessive contagion of inflationary shocks to consumers. LOr such episodes we are witnessingEssentially price control efforts. These actions logically lead to shortages, because producers can no longer control their margins and lose money by producing products that not only bring them nothing more, but also cost them to produce. These price controls may occur at the distribution level, but we have been witnessing a control upstream in the futures market for several days, which we are following in great detail here.
The nickel market is a perfect illustration of this desire for price control. Llast week, London Metal Market (LME) regulators have halted all trading in the nickel futures market. VSthis weekWe learned that these same regulators canceled more than 4 billion equivalents $ Transactions to protect one of the participants. The LME increased the contract margin during the exchange interruption, imposed a very strict regulation of transactions from now on and closed the market if the price variation exceeded +/- 5%. These new rules are intended to discourage agitation squeeze the shorts Which threatened one of the participants, on the brink of losing billions if the market was not closed.
This implementation of futures price controls jeopardizes the entire credibility of this market. requirement Risk of deportation Anywhere other than the LME.
One of the essential missions of the futures market is price regulation. Declassified in 2005, this “cable” indicates that the gold futures market, established on December 10, 1974, was primarily aimed at suppressing the physical demand for gold and controlling its price:
When price controls become highly sensitive, as is the case with nickel today, the credibility of the exchange system is called into question, which logically forces the market to adapt to another system of “price discovery.” Then we enter a system of out-of-control exchanges, where the official price derived from futures is no longer the market price. Similar to what happened at the end of communist rule in Eastern Europe. During my trip to Romania in 1989, II remember That there were actually two levels of tariffs for everyday consumer goods (gasoline, food, care, etc.), because the official prices imposed by bankrupt government price controls had nothing to do with market reality.
This could happen with the declared failure of price controls in the futures market in a context of high volatility in raw materials and at a time when we are witnessing rampant nationalism in all the world’s assets.
In the precious metals market, we are beginning to see a disconnect between the official price determined by the futures price and the actual metal price, which is less and less available in the real market.
Premiums are increasing and derivatives markets no longer take into account the sometimes violent corrections
The US Mint thus recorded a record order of 70 million $ Gold and silver coins and bars in one day on Monday despite the bonus Even more than last year On most products.
The COMEX market has seen a record number of requests for gold supply in recent days. This is even more spectacular in the physical silver market, where delivery requests have never been so early… almost 1,700 tons of physical silver are officially awaiting delivery on the COMEX!
The establishment of derivatives markets in 1974 sought to avoid the massive accumulation of physical gold currently occurring in the United States, despite noting volatility in futures prices.
This gold rush is also happening in Europe, where ETFs related to physical gold have risen by nearly $3 billion in just one week.
Faced with devaluation of the ruble in Russia, the rush independent Such is the case with physical gold that central banks have had to stop buying due to strong demand. Since the implementation of the ban, the Russian gold market has been almost exclusively domestic. Kazakhstan decided this week to freeze its gold exports to save its currency, making it more difficult to supply gold to Russia.
With increased price controls, exchange controls that are pronounced, the price of physical gold can logically be adjusted further from the official price in the futures market. This movement is likely to accelerate as we see the first shortages of metals, which will be a consequence of these price controls.
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