Interconnected changes in the stock, commodity and currency markets
Determining to what extent financial investments affect the level and volatility of commodity prices is a difficult task due to limited transparency and the level of disaggregation of existing data. Nevertheless, there are data supporting the view that financial investors influence the price dynamics in the short term. Some of this data relates to the role of sharp changes in financial positions in the oil market in the period from February to May 2011. Other data refer to a strong correlation between the movement of commodity prices and trends in the stock and currency markets that are known to be affected by speculative operations.
A comparison of the dynamics of commodity prices and stocks over different business cycles shows that these prices usually changed in opposite directions in the early stages of recovery during previous cycles. On the contrary, during the most recent cycle, the increased synchronization of price movements became noticeable, which is surprising because of the extremely low capacity utilization rate in the wave of the "great recession" 2008 and 2009, which showed very low demand for commodities. Despite this, commodity prices rose even before the start of recovery in the second quarter of 2009 (2010-2011) and continued to grow over the next two years, in part because of increased demand in emerging market countries The same time is largely due to purely financial transactions. Therefore, after two years (in 2011-2012), the reaction from the monetary policy followed, although the level of capacity utilization in developed countries is still very low. This shows yet another worrying aspect of the impact of financialization, which has so far been underestimated, namely its ability to harm the real economy as a result of the transmission of distorted signals for macroeconomic management.
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Response measures to commodity price volatility
Short-term emergency measures are needed to prevent or mitigate the negative impact of unfavorable commodity price movements. At the same time, there is a need to develop ways to improve the functioning of commodity-based commodity derivatives markets so that these trading platforms better perform their role in providing reliable price signals to producers and consumers of commodities, or at least to prevent them from becoming sent distorted signals. In this regard, UNCTAD points out that a set of four policy measures, especially for food and energy, should be considered to improve the functioning of markets:
• The transparency of physical goods markets should be improved by providing more timely and accurate information on commodities, such as free capacities and global oil reserves, and for agricultural products, cultivated areas, expected harvests, stocks and short-term demand forecasts. All this would allow commercial market participants to more easily assess the current and future fundamental relationship between supply and demand;
• It is necessary to improve the flow and access to information in commodity derivatives markets, especially regarding positions held by different categories of market participants. This would increase the transparency of the markets. In particular, measures aimed at ensuring compliance with reporting requirements for trading on European exchanges, similar to the requirements applied on US exchanges, would significantly increase the transparency of trading operations and prevent the transfer of operations to other jurisdictions based on regulatory considerations;>
• Tighter regulation of financial market participants, in particular limit positions, could weaken the impact of financial investors on commodity markets. The implementation of transactions from own funds by financial institutions that deal with hedging their client's positions could be prohibited due to a conflict of interest. To do this, you need to find the & quot; golden mean & quot; between the introduction of an excessively restrictive regulatory regime that would jeopardize the functions of commodity exchanges associated with the transfer of risks and the introduction of too mild regulation that would equally undermine the basic functions of exchanges ";
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• market surveillance authorities could be instructed from time to time to directly intervene in exchange trading by buying or selling derivative instruments in order to prevent a sharp drop in prices or to reduce the "price bubbles" . Such interventions could be considered as a last resort to counteract the formation of speculative bubbles if reforms aimed at increasing the transparency of markets and on tightening market regulation are either not carried out or will prove ineffective.
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