There will probably be both good news and bad for commodity traders over the coming months. It will likely be easier to move in and out of commodity transactions but prices are also expected to become more choppy, according to David Phipps, Head of Commodities at ABN AMRO.
Liquidity within those markets is expected to increase as a range of new entrants begins to move into the market, said ABN AMRO. But the trading patterns of some types of investors will also bring the greater price volatility to commodities that is typically more familiar in financial markets.
Speaking at ABN AMRO’s latest overview of the commodities market, Phipps explained that commodities have now become ‘fashionable’ as an investment vehicle.
Discussing the changing “drivers” to supply and demand of underlying commodities, Phipps said that following the entry of hedge funds, demand could be fuelled by pension funds in basket-type trades in the future.
Another type of investor likely to move into commodities trading is the Professional Trader Group (PTG), he said. Often formed by day traders to take advantage of economies of scale, PTGs currently operate widely within the financial markets. These groups represent up to 50 per cent of daily trading volume in financials and could have a significant impact on liquidity, Phipps said.
“All but two of the major European commodity exchanges have now made the transition to electronic trading; with lower barriers to entry it is likely that PTGs will begin trading commodities,” he explained. This additional liquidity will be of significant benefit to the commodity markets overall.”
ABN AMRO’s “sector experts” also provided views on the outlook for specific commodity markets at the briefing. This revealed a variety of influences, among which political uncertainty remains a key factor.
More surprising was news that the cocoa market could see a significant increase in demand from Japan, where the benefits of chocolate as a health product are now being widely discussed, the sector experts said.