Huge amounts of investment money pouring into commodity markets is increasing the risks for brokers, leaving the market more vulnerable to volatility, the chief executive of brokerage firm Sucden told Reuters.
We're now living in different market conditions than we did a few years ago, said Michael Overlander, CEO at UK-based Sucden, a leading London Metal Exchange ring dealer.
Because of the size of the investment the hedge funds are throwing at any markets, if the liquidity is not there, the exaggeration of the prices is going to be even greater than it was a year or two ago.
Concerns about global liquidity and the credit squeeze, triggered by fallout from the U.S. subprime mortgage market, hit commodity markets in August, along with other investments such as equities and emerging market assets.
In the base metal market, where volatility has demonstrated that it is pretty high, the risk taking is much greater for the market maker, he said.
If he's not prepared to take as much risk today as he was a couple of years ago, liquidity will dry up and volatility is going to increase.
Markets had stabilized after the recent volatility and were showing signs of healthy demand, Overlander said.
A MIND OF ITS OWN
(Metals) markets started to regain a slightly bullish stance and I would not be surprised to see prices remain fairly steady for the rest of this year.
Among industrial metals, copper is hovering near its highest level in five months and is now around $500 away from its all-time high of $8,800 a tonne hit in May 2006, while lead in recent days has set successive record highs.
There's money coming into commodities all the time ... and we'll see this continue over the next year, Overlander said, but added that sentiment, if it turned negative due to a U.S. recession, could prevent a market rally.
Sentiment has a mind of its own and is more often than not what drives the marketplace, he said.
During the recent turmoil in global financial markets, industrial metals were taking their cue from equity markets, rather than trading according to their own fundamentals.
Investors, fearing that a possible slowdown in the United States, the world's biggest economy, could hit demand for base metals, have been avidly watching U.S. economic data.
One would expect some reaction on the downside in markets, if we see a slowdown, he said.