Very quietly compared to all the noise about the big bailout proposal from the US Government and the other move for the Fed to offer a lifeline to struggling mutual cash management funds, new steps to relieve distressed commodities markets were launched Friday by US regulators after Lehman and AIG woes triggered a wave of selling and emergency actions by exchanges earlier in the week.
The Commodity Futures Trading Commission, the main regulator of US commodity markets, said it was ”prepared to provide temporary and conditioned hedge exemption relief for firms taking on swap positions from distressed companies”.
The move would allow Wall Street’s investment banks and trading companies to take over some large commodities’ positions held by Lehman Brothers and AIG, known as swaps, without surpassing limits set by the regulator and the exchanges on speculative limits.
”This will allow for continued risk management and orderly functioning of the markets,” the CFTC said in the statement.
That means in particular the huge oil market will be stable.
AIG acts as a counterparty to a substantial portion of the $US30 billion invested in the DJ-AIG commodity index, the second most popular benchmark in the asset class. Lehman Brothers was also a significant player in commodities markets.
The CFTC added that it was coordinating with commodity futures exchanges to facilitate rare block trading, which allow the transfer of large positions. That would allow the people liquidating Lehman and winding up AIG’s speculative positions to handle large groups of deals with the same counterparties.
“CFTC staff is engaged in heightened monitoring and surveillance of financial company single-stock futures traded on futures exchanges – in coordination with the SEC’s emergency action on short selling and in our collective effort to prevent manipulation of financial stocks,” the Commission said.
That will be significant as already there are traders developing ways of circumventing the ban on short selling: one is sell the S&P500, then hedge the stocks you don’t want; in effect you short sell the stocks remaining in the position unheeded.
The move links to the one on Friday where cash funds were guaranteed. Many mutual funds have commodity based offerings and investors use the associated money market fund when moving their money from fund to fund..
The US Treasury on Friday rushed to the aid of ailing money market funds, saying it would guarantee the holdings of funds as it attempted to prevent the spillover of the financial crisis to the $US3.4 trillion business.
In establishing the temporary guarantee program for the US money market mutual fund industry, the Treasury tapped the Exchange Stabilisation Fund, which was established by the Gold Reserve Act of 1934 in response to the Great Depression. The support will be done via the Fed.
The move to shore up the fund is designed to allow the Treasury to insure the holdings of any publicly offered eligible money market mutual fund – both retail and institutional – that pays a fee to participate in the program.
It came after the Reserve Fund was forced to reveal it was ‘breaking the buck’ in paying investors 97c in the dollar and not the usual $1 in redemptions after being exposed to $800 million worth of Lehman Brothers debt that is facing big losses.
Crude oil rose Friday in New York, capping the biggest three-day rally in almost a decade, on speculation government measures to resolve the bank crisis will spur the economy and bolster petroleum demand.
That’s the theory, the reality is that there will be no impact on the US economy and oil prices will start sliding very quickly.
Oil rose 6.8% on Friday as output disruptions from hurricanes in the US and attacks in Nigeria’s main oil producing region continued to have as much impact on price and sentiment as what was happening in the sharemarkets and credit system.
October crude futures jumped $US6.67 to settle at $US104.55 a barrel in New York after rising 7.4% to touch a day’s high of $US105.25 a barrel.
Oil prices rose 15% last week, the biggest three-day rally since December 1998 as shorts scrambled to cover short positions.
That lifted the week’s performance to a 3.3% gain, the first weekly rise since mid August. It’s still down 29% from the high of $US147.27 reached on July 11.
The October contract expires tonight, our time, so when the Fed and the US Government moved on the mega bailout, traders decided to cover their positions.
Inventory positions in the US in the wake of twin Hurricanes Gustav and Ike will be key figures for the market this week.
Energy companies have resumed about 12% of oil production and a quarter of natural-gas output in the Gulf of Mexico after shutting almost all of it before the hurricanes.
The Gulf accounts for about 26% of American oil output and around 14% of gas production.
In Nigeria, Shell warned that the recent escalation in militant attacks would hurt earnings. The country has lost about 280,000 barrels a day from the violence on top of production already shut-in, according to government officials.
November Brent crude rose $US4.42, or 4.6%, to $US99.61 a barrel in London.
Gold futures dropped sharply on Friday to end a very volatile week.
But it still had its biggest weekly gain in almost nine years on the turmoil in the financial markets.
Comex December gold futures fell $US32.30, or 3.6%, to $US864.70 an ounce in New York, but the metal jumped 13% over the week, up $US100.20, the best since October 1999.
Comex December silver futures dropped 22.5 USc, or 1.8%, to $US12.475 an ounce on Friday. That left it up 16%, the best since early 1987.
Gold is now up 3.2% so far this year, while silver has dropped 16%.
Comex Gold for immediate delivery rose $US18.26, or 2.2%, to $US869.23 on Friday.
Copper had its best day in a month after the US bailout was revealed.
Comex December copper futures rose 11.05 USc, or 3.6%, to $US3.1765 a pound in New York. But that still left the metal down half a per cent over the week.
On the London Metal Exchange, three month copper rose $US311, or 4.6%, to $US7,060 a tonne, or $US3.20 a pound. The price is up 5.8% this year.
Nickel however had its biggest weekly drop in almost four years as stocks of the metal rose to a nine-year high, signalling weak demand from consumers, led by stainless steel producers.
London Metals Exchange stock rose 0.9% to 52,326 tonnes, the highest since July 1999.
That was after a 0.6% dip in second quarter stainless steel output this year, compared to the same quarter of 2007.
Three month nickel ended at $US16, 843 a tonne. The fall was more than 12% for the week, the biggest since October 2004.
The International Nickel Study Group said the world’s nickel surplus rose for a third month in July as consumption of the metal dropped to a nine month low.
The INSG said nickel production of the metal exceeded demand by 9,900 tonnes tons in July, compared with a surplus of 7,700 tonnes in June.
