The outbreak of the war in Ukraine and the volatility that this has caused on the commodity (future) markets are a threat to financial stability. The commodity markets and the financial markets are interlinked in a complex way. The large price movements expose weaknesses in the system.
Klaas Knot, chairman of the Financial Stability Board (FSB) warned about this last week in a letter to the finance ministers and central banks of the G20 countries. He added that the market has been able to absorb the shocks well so far. As major risks of commodities trading for the financial markets, Knot cites large margin calls (the account cover is insufficient to cover the risk on the open position), undetected leverage and concentrated exposures.
Warning
Despite this, the markets generally survived the extreme volatility in February and March without major disruptions, with the exception of nickel on the London Metal Exchange (LME). There the three factors mentioned by Knot came together, which caused a rapidly rising nickel price and eventually led to a short squeeze (speculator sells the underlying asset without actually owning the product with the expectation that the price will fall). The LME temporarily halted trade in nickel due to the extreme price increase. The LME's actions are now the subject of lawsuits and are being investigated by the market regulator.
Several authorities, including the International Monetary Fund (IFM) and the European Securities and Markets Authority (ESMA), have noted that the nickel market debacle was a sign of underlying problems in commodity markets. According to Knot, the stress on the market is not over yet and the market is becoming increasingly difficult to predict due to ongoing volatility. Liquidity problems can arise in the commodities market, but also outside it.