Launch of a CEPS-ECMI Task Force Report
Markets are in constant flux and commodities markets are no exception. Their market structure has evolved at an incredible pace over the past decade, driven by soaring international trade, easier access to international finance and technological developments in trading infrastructure. While the commodities super-cycle appears to be fading away, barring a shift in regulatory policy, the interaction between the physical markets and the financial system is likely to remain strong for the foreseeable future. Due to accommodating monetary policies and financial deregulation, the high returns generated by growing international trade fuelled by demand emanating from emerging industrial economies have attracted the interest of financial institutions hoarding cash for what has been commonly perceived as an anti-cyclical asset class. Financial leverage has been therefore instrumental in the development of international trade and empirical evidence points at the benign role of speculation in the long-term, but it is more controversial in the short-term. More interaction with the financial system also means easier access to financial leverage by commodities firms, and in particular by trading companies, which may have become ‘too-physical-to-fail’. The combined effects in the last decade of international trade, monetary policies, and technological developments in market infrastructure have made physical markets more interconnected among them and more intertwined with the financial system. The new market structure intensifies the magnitude of non-financial and financial shocks, even if they take place in a small region of the world. Click here to see the programme.
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