Commodity swings could pose ‘outsize’ hit to economy, says G20 watchdog

By Huw Jones

LONDON (Reuters) – The G20’s financial watchdog said on Wednesday that commodity markets should be closely monitored, since energy and metal prices swings like those triggered by Russia’s invasion of Ukraine potentially pose an “outsize” hit to the global economy.

The Financial Stability Board, which groups treasury officials, central bankers and regulators from the Group of 20 Economies (G20), said it was now beginning to scrutinise commodity markets to identify vulnerabilities.

While these markets were able to withstand significant volatility without major disruption, apart from nickel trading in London, they were too central to the broader economy to avoid closer scrutiny, the FSB said.

“The centrality of key energy, metals and food commodities to the functioning of the global economy means that any disruptions to the financing of producers or traders in these markets could have an outsized impact,” FSB Chair Klaas Knot said in a statement before a meeting with G20 finance ministers and central bankers in Indonesia.

“The volatility in commodity markets following Russia’s invasion of Ukraine has highlighted the risk of financial strains in these markets – through large margin calls, undetected leverage and concentrated exposures,” added Knot, who also heads the Dutch central bank.

The watchdog will conduct “deep dives” into the behaviours of commodity traders, for example, to identify how stresses in the sector could ripple more widely, Knot said.

Regulators use such deep dives to better understand markets, and can presage calls for greater transparency and regulation.

The Bank of England said last week it will conduct an in-depth analysis to enhance surveillance of “opaque” commodity markets to get a fuller picture of risks.

Knot also said countries need to keep up momentum in addressing financial risks from climate change.

“Current developments should reinforce, rather than detract from, international sustainability ambitions,” he said.

Higher energy prices have prompted countries like Germany and Italy to consider bringing back coal, potentially setting back the push to a net zero economy.

The adjustment by financial markets to higher interest rates to quell inflation has also been relatively smooth, though liquidity in some key funding markets has deteriorated, he added.

An unexpected deterioration in economic conditions may test the resilience of financial institutions, Knot said.

(Reporting by Huw Jones; Editing by Frank Jack Daniel)