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MAR. 18, 2022

Sorry, we're Closed

On March 8th, the London Metal Exchange was forced to halt nickel trading after its price soared to more than 100'000 USD per tonne, up from 25'000 USD per tonne at the beginning of the month. The dramatic price increase is due partially to the invasion of Ukraine since Russia is the third-largest global producer of nickel and partially to traders being squeezed out of their short positions into nickel through margin calls.

The London Metal Exchange's response was to cancel transactions and suspend trading in the afternoon of the 8th for a few days, to cool down the price frenzy, and to allow traders to post further collateral to avoid margin calls.

Trading can be halted for many reasons: as we write, the Moscow Stock Exchange is going through its longest ever shutdown. The central bank announced it on February 26th to shield the market from the impact of international sanctions, and has yet to announce a reopening. Shutdowns related to war have a precedent in the four-and-a-half-month shutdown of the New York Stock Exchange in 1914, at the beginning of World War I, and in the four-day shutdown of all US stock markets in 2001, after 9/11.

Trading can also be halted for short periods: most stock exchanges have so-called "circuit breakers" in place, which trigger temporary halts when prices begin to move wildly. In the US, there are three levels of circuit breaker: trading is halted for 15 minutes when the benchmark S&P 500 Index declines 7%, and again for another 15 minutes when the decline reaches 13%. A 20% decline from the previous day's closing price triggers a trading halt for the rest of the day. In March 2020, the first-level circuit breaker was triggered four times. Circuit breakers can help limit panic during a sell-off, curbing erroneous trading and generally calming down market participants, but they can also backfire.

China introduced the circuit breaker mechanism on January 1st, 2016, after a particularly volatile second half of 2015 in the Shanghai and in the Shenzhen Stock Exchange. The mechanism was suspended on January 8th, 2016, after trading suspension for the day was triggered twice in less than a week.

What can we expect from the reopening of the Russian market? In the case of WWI, the Dow Jones Industrial Average Index fell more than 20% when the market reopened. On the other hand, the S&P 500 Index fell about 5% when the US stock markets reopened in 2001. In the case of nickel, the London Metal Exchange has been limiting the daily price movement to -8% to avoid extreme selling pressures. If European listed Russian ADRs are anything to go by, the average decline is more than 90%. From what we can observe, a mild correction seems unlikely, particularly if the halt is lifted before a resolution between Ukraine and Russia is reached.

We thank you for your continued support.

The FAM team