(Kitco News) - The trend of major banks leaving the commodities business could hurt liquidity in the short term, but eventually other trading firms will fill the void, say veterans of the commodities business.
Most do not look for a major impact on the price trend of commodities in general; after all, speculators can establish either long or short positions. Nevertheless, some pointed out that past moves by banks to exit happened to coincide with a bottoming in commodities prices.
Credit Suisse said Tuesday it plans to wind down its commodities trading to focus on other areas of its business. Previously, Deutsche Bank, JPMorgan and Barclays also said they are either scaling back or exiting the commodities arena.
Commodity markets generally may be less liquid for a year or two, said Dennis Gartman, a veteran trader and publisher of The Gartman Letter.
“But even that will, over the course of time, be eased,” Gartman said. “People will move in and take their place. That’s already happening. We’re seeing hedge funds and we’re seeing the Glencores, et al, buying the commodity businesses that the banks are getting rid of.”
Others echoed similar sentiments.
“The markets will keep functioning just as they have,” said Bill O’Neill, one of the principals with LOGIC Advisors. “You’ll have new people come in and pick up the slack.”
“It’s not like speculating in commodities is going to go away,” added Phil Flynn, senior market analyst with Price Futures Group. “It’s just going to be different big-money groups that are going to go in there and fill those voids for commodities.”
Flynn commented that there has been some drop-off in trading volumes generally, but suggested it’s hard saying whether this is due to scaling back by banks.
“It’s kind of the chicken-and-egg routine,” he said. “I don’t know if we’ve seen volume drop off in some of the commodities because some of the big banks are pulling out, or if we’re seeing volume pull back because prices are relatively stable and we’re seeing more money move into the stock market.”
For instance, he said, there was a fair amount of investment in grain markets the last couple of years due to tighter supplies. However, some of that money has gone away on expectations for strong harvests.
“My belief is that when market conditions justify it, the money is going to come back,” he said.
Flynn commented that banks may be feeling some regulatory pressures, plus markets “have been more difficult for them.” It was easier for them to make money during a “super cycle” in commodities for much of the time since the turn of the century, he said. “It’s been tougher in recent years.”
Little Impact Expected For Price Trends
Observers do not appear to be looking for any change in price trends as a result of banks scaling back commodity trading.
“It’s not going to affect prices at all,” O’Neill said. “Commodities will do what they’re going to do. In a certain sense, I think it’s constructive in that it will get commodity trading back in the hands of commodity-based people as opposed to these large players.”
Ralph Preston, principal with Heritage West Financial, figures the biggest impact of the reduced bank participation simply will be on the employees losing their jobs, rather than on commodities themselves. Nevertheless, he added, any reduced liquidity could mean greater volatility.
“Is it going to be skewed to the upside or downside in terms of prices – I’m not quite certain yet,” he said. “But the larger players absolutely provide liquidity to the markets.”
Flynn added that the markets could be subject more to the whim of high-frequency traders rather than those with longer-term views.
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Gartman commented that this is not the first time when the major banks have gotten into a business near the top and later exited at the bottom.
“It is astonishing to me how often they do this,” he said, also citing mortgage lending before and after the financial crisis. “To me, I think this signals a probability of a bottoming in commodity prices, not a peaking of commodity prices.”
O’Neill was once managing director of commodities research with Merrill Lynch before the firm shut down its commodities business in 2002. Shortly afterward, he recalled, commodities “became the hottest thing in the world,” with many investors piling into the asset class.
“The large players don’t have as good history as far as exiting the market at the right time,” he said, but adding that he isn’t necessarily predicting commodities will take off again in the current atmosphere.
By Allen Sykora of Kitco News; asykora@kitco.com
