Influence of banks, hedge funds on commodities lowest since 2008

LONDON (Reuters) - United Nations economists who previously called for government intervention to tame volatile swings in commodity prices say banks and hedge funds have since reduced their influence to the lowest level since 2008.

In a 2012 report for the UN Conference on Trade and Development (UNCTAD), David Bicchetti and Nicolas Maystre said the rise of financial players in commodities markets over the previous decade had moved prices of oil and grains away from the fundamentals of supply and demand.

As a result, commodity prices became more volatile and were increasingly linked to moves on equity markets, they said.

But the latest data to March 2014 shows a large reduction in the so-called ‘financialization’ of commodities, they said in an interview this week.

“As financial investors including banks and hedge funds have reduced their activity in commodities markets in the last two years, we’ve seen a marked drop in the correlation between the returns on the equity markets and the returns on oil and other commodities futures markets,” Bicchetti said.

The economists said they still believed there is a need for increased government control.

“High levels of speculative activity have made commodity markets less stable than they used to be, and there is still an argument for greater regulation and potentially intervention in times of heightened market stress,” Maystre said.

UNCTAD has a mandate to further the trade and investment interests of developing countries, many of which rely heavily on commodity imports and exports and are vulnerable to price swings.

“While we would like to carry out further investigation of the data, we believe this preliminary analysis shows that our original thesis of increased financialization of commodity markets was correct,” Bicchetti said.


The 2012 study found that the daily correlation between U.S. crude oil futures and the main U.S. equity futures rising to around 0.8 to 1 in 2011 from 0.2 in 2007.

Over the last two years, however, that number has fallen back to pre-2008 levels, the UNCTAD economists said.

“While we welcome the reduction, the correlation between commodity markets and broader financial markets was just one of the effects of increased financialization,” Maystre said.

Banks such as Deutsche Bank DBKGn.DE and JPMorgan JPM.N have been exiting or reducing their presence in commodity markets in the face of stricter regulation, rising capital requirements and the view in some quarters that the commodity super-cycle has peaked.

Brent crude has averaged around $110 a barrel in each of the last three years, well below the peak of $147 a barrel hit in summer 2008, before it crashed to less than $40 during the financial crisis.

Bicchetti and Maystre said that while the rise in U.S. shale and tight oil production may have contributed to a reduced link between equity markets and commodity futures, they still saw the swings in financial participation as playing the largest role in reducing correlations between the two.

“High frequency traders who commented on our earlier research generally agreed with its conclusions, including that they had driven greater correlations, but they still believed they were offering a valuable service to the market,” Bicchetti said.

“The void left by the banks is also starting to be filled by independent trading houses ... and it is not clear how many of the new European and U.S. regulations that have been proposed will apply to them. I don’t think this is the end of the story.”

editing by Jane Baird