Bank of America Corp. has turned to the philosophy of the television screenwriter to elaborate on the risks from jumping intosoaring Chinese commodity futures markets.
Spoiler Alert: They can ruin your day.
“In the Game of Thrones, before someone declares interest of entering the game, he or she needs to think carefully because the consequences of losing can be extreme,” the bank’s analysts including David Cui said in a note. “The same could be said about the latest ‘game’ of trading commodity futures.”
That’s a nod to the hit HBO series, in which character Cersei Lannister declares: “When you play the game of thrones, you win or you die. There is no middle ground.”
Trading in futures such as steel rebar surged last week as data showing rising credit in the top commodity consumer led to speculation demand would improve. Volumes for rebar on April 21 were more than China’s annual output, raising concerns boom would lead to a bust similar to past moves in equities.
Fast Show
“What goes up fast, particularly if driven by leverage, often goes down fast as well,” the Bank of America analysts wrote. “The euphoria in the commodity futures market may not last beyond a few months at most.”
Interest is growing on speculation China will try to spur growth with measures including infrastructure investments amid poor consumer demand and weak exports, they said. The emergence of funds that don’t price risk correctly are contributing to inflows, they wrote.
Futures for rebar extended gains on Monday, ending 0.9 percent higher at 2,643 yuan ($407) a metric ton on the Shanghai Futures Exchange. The price of the product used to strengthen concrete advanced for an 11th week through Friday, adding 14 percent.
To cool the spike in trading, the SHFE has increased transaction fees, while the Dalian Commodity Exchange, which has an iron ore contract, raised margin requirements. The bourse in Dalian also tightened rules on what it called abnormal trading, which now includes frequent submission and withdrawal of orders.
While China may introduce more controls should the rally continue, steel mills and traders may also force a halt by locking in prices for some of their future output, the bank said.
Then the show may really be over.