Base Metals Bounce Back In Shanghai After Brutal Selling Binge, US Dollar Strength Fades

Photo: Base Metals Bounce Back In Shanghai After Brutal Selling Binge, US Dollar Strength Fades

The reasons for the steep drop in US bonds late last week are still something of a mystery, but their results in the world markets seem to be obvious at this point.

Reuters reports that many algo-run funds funds had been involved in a 'long equities, short volatility' trade, and that market dynamic went up in smoke over the last few trading days. While the broad market indices across the world seem to have recovered somewhat, the damage that algos can cause is now very clear.

Regardless of the four digit drops that many equity exchanges saw, base metal prices seem to be moving past the storm. Traders are reportedly eyeing ongoing drawdowns in copper warehouse stocks, at a time of the year when the world's largest consumer of the metal, China, is preparing for lunar new year.

The lunar new year celebrations generally lead to a pop in physical demand for precious metals, but over the last week, LME warehouse stocks for copper have dropped by more than 13,000 tonnes. This appears to be a result of a tight physical market, and worries about the supply situation going forward.

A Real Economy

Lead was the only base metal traded in Shanghai to lose on the day, with a small drop of -0.5%.

The rest of the complex was up, and as the LME opens, many of the metals look like they are getting ready to take a positive cue from Asian trading. This could demonstrate the beginning of a reevaluation of how metals are seen vis a vis the US Dollar, and what risk is in a global market place that is flying high on easy debt.

It is worth remembering that over the last decade, in the wake of the crisis in 2008, the non-western financial system has been working to create ways to settle trades outside of the existing system, and use alternative methods like bilateral swap agreements.

China is at the heart of this movement away from a US led global financial system, and it should come as no surprise that they are also the largest importer of oil in the world. This title was held by the US for a long time, but now, things in the real world are changing.

Dollars Aren't Real

A US Dollar, like any modern fiat currency, is the absence of existence.

As the selling in global markets subsided, the US Dollar lost its momentum above 90 on the US Dollar Index, and is currently trading around 89.50. It remains to be seen if this was a knee jerk reaction to the bloodbath in equities, but it seems unlikely that the US Dollar's fundamentals have changed in the last few days.

While a debt can be settled in an asset that has a positive existence, like gold, the modern financial system is literally comprised of debt. This means that a liquidity crisis today means that some financial institution needs to have more nothingness, which is an absurd concept.

But that is how our current system works.

That is why in the fullness of time, or maybe next week, faith and confidence in a western debt led monetary system could evaporate into thin air. When the dust settles, and all the algos are turned off, the nations that can still produce something of value will be in a great position.

Places like the USA, who have been getting by on exporting debt for the better part of half a century may not find the new normal as attractive. Whether or not this recent market drop is the start of bigger things to come is impossible to know, but when the crisis of confidence comes, it is likely to look like what we all just witnessed.