We should accept the volatility in market which is tied to specific events or announcements. When information changes, markets change. What is harder to take and more dangerous is the risk from price moves that are not tied to specific event or when a seemingly small event leads to a large change. This is what happened in the commodity markets last week.
Commodities were hit with massive sell-offs with strong declines in silver in energy. Everyone was talking about a silver bubble and the sell-off may have been localized because of margin increases, but the general price decline was unexpected. Analysts have to engage in the old game of trying to link news to a market event even if the correlation is tenuous. Nevertheless, we can still try and make a case for a commodity sell-off.
The slowdown in US economic numbers coupled with the lack of action by the ECB were the op stories in economic news. These could easily be argued to be at odds with a commodity sell-off. Clearly a sell-off in oil should be expected if there is a slowdown in global growth, but Libyan production has not been offset by Saudi pumping.
The alternative explanation is that markets are subject to cascades or massive changes in expectations which may feed on themselves. This seems a more likely explanation when a market moves to extremes. With speculative positioning moving to extremes, any small change in the cost of holding position will lead to profit-taking. This may have started in some commodity markets when margins were increased, but carried over to others under the believe that there will further increases in margin.
We could call the sell-off of May as the increased margin cascade. Margins are used to support the clearinghouse, but increases change the calculus of profit. Higher momentum is necessary to support the market.If that higher price action is not expected, profits will be taken and the sell-off will begin. The feedback loop will continue given the cost of trading has increased.
Commodities were hit with massive sell-offs with strong declines in silver in energy. Everyone was talking about a silver bubble and the sell-off may have been localized because of margin increases, but the general price decline was unexpected. Analysts have to engage in the old game of trying to link news to a market event even if the correlation is tenuous. Nevertheless, we can still try and make a case for a commodity sell-off.
The slowdown in US economic numbers coupled with the lack of action by the ECB were the op stories in economic news. These could easily be argued to be at odds with a commodity sell-off. Clearly a sell-off in oil should be expected if there is a slowdown in global growth, but Libyan production has not been offset by Saudi pumping.
The alternative explanation is that markets are subject to cascades or massive changes in expectations which may feed on themselves. This seems a more likely explanation when a market moves to extremes. With speculative positioning moving to extremes, any small change in the cost of holding position will lead to profit-taking. This may have started in some commodity markets when margins were increased, but carried over to others under the believe that there will further increases in margin.
We could call the sell-off of May as the increased margin cascade. Margins are used to support the clearinghouse, but increases change the calculus of profit. Higher momentum is necessary to support the market.If that higher price action is not expected, profits will be taken and the sell-off will begin. The feedback loop will continue given the cost of trading has increased.
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