Mar 17, 2022 - Economy

Avalanche of uncertainty drives markets to breaking point

Illustration of a square with a market trend line moving every which way within it, bouncing from side to side.

Illustration: Aïda Amer/Axios

The Russian stock market is shuttered. Gasoline prices are soaring, yet the U.S. won't buy cheap Russian oil. The market for nickel stopped trading for a week, tried to restart, then stopped almost immediately.

Why it matters: Sanctions, government actions and remarkable price moves are rocking our once-unshakable reliance on rational markets as a pillar of the world economy.

The latest: The 145-year-old London Metal Exchange (LME) reopened trading in nickel yesterday after a weeklong freeze — only to slam the market shut again within minutes due to a technical problem.

The backstory: The initial nickel market shutdown followed an extraordinary short squeeze that sent prices up over 250% in a little more than 24 hours, culminating on March 8, when they climbed above $100,000 per metric tonne.

  • The seismic move triggered a cascade of margin calls that would have likely bankrupted major players in the market — and perhaps the exchange itself, though officials there deny it — had the LME not said, basically, "oh, well nevermind," and canceled the offending trades.
  • Bloomberg has a great blow-by-blow of the chaos here.
  • Some people who, presumably, would have made some decent scratch on those trades, are not pleased.

What they're saying: "For the LME to cancel nickel trades between willing buyers and sellers is unforgiveable. UNFORGIVEABLE.," wrote Mark Thompson, a metals trader, on Twitter.

The big picture: For decades following the fall of communism, the global economy was organized around the idea that financial markets were reliable and accurate mechanisms for measuring and managing the universe of risks facing companies, investors and the world.

  • These ideas were rooted, in part, in the so-called efficient market hypothesis, the quasi-mystical — but incredibly influential — idea that market prices fully and correctly reflect "all known information."
  • Many people then made the leap that the market in some sense always identifies prices that are "correct.”

Others however, argued that markets can't incorporate all known information — because sometimes people with good info can't participate. This idea is known as "limits to arbitrage."

  • The financial world is now confronting some serious limits to arbitrage.

Matt's thought bubble: I'm no hedge fund genius but it seems like a pretty good bet that Russian stocks will probably fall, since the West has hammered the country economically with sanctions. Some people probably want to short the Russian market!

  • Well, they can't. Such bets on falling stock prices were banned in Russia almost as soon as the tanks started to rumble toward Kyiv.
  • And in case that was enough, the entire market was shuttered soon after the short-selling ban. The Russian market has been closed since Feb. 25.

Ok, well, how about Russian oil? It's obviously undervalued, since it's trading for an unprecedented $30 discount to other global oil benchmarks. Buying it seems like a good trade!

  • Except that sanctions mean there's no reputable U.S. broker who would let anyone make such a trade. (And that, by the way, is why it's cheap.)

Where it stands: When the London Metal Exchange reopened trading in nickel yesterday morning, there were clearly plenty of people who thought that the insanely high nickel prices couldn't last. And they wanted to sell.

  • As a result, prices plunged so fast that some trades exceeded the new 5% limit on daily price changes that the exchange had imposed — forcing it to suspend trading for a time once again. (You could, however, execute trades in that bastion of market freedom, Communist China, at the Shanghai Futures Exchange.)
  • The LME was finally able to reopen trading at roughly 2 p.m. yesterday, but had to halt again this morning.

The bottom line: Markets are human institutions. When events get as crazy as they are now, the illusion of markets as a completely separate system from either grand geopolitics or the more mundane politics of any institution — like a metals exchange — suddenly disappears.

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