Markets

(Jakarta)

Unbeknownst to most, the Ukraine crisis has had a surprising effect on the important global palm oil market—it has caused it to tumble. Palm oil is an important ingredient in a wide range of products, from soap to food, but recently, a glut of sunflower oil has lowered wholesale demand for the substance. Ukraine and Russia have both seen bumper sunflower crops this year, and because of the turmoil in the region, have been eager to sell it immediately, creating a wealth of global supply that has hurt palm oil prices. That is bad news for economies like Indonesia and Malaysia, who together produce 80% of the world’s palm oil. The declining prices have huge implications for Indonesia, as much of the country’s banking portfolio is backed by palm oil, meaning the asset quality of the country’s banks is declining rapidly. Palm oil prices have fallen 30% this year.


FINSUM: While this news may be very poor for Southeast Asia, it is great news for European food suppliers like Nestle, who are seeing the lowest prices in years for one of their principal raw materials.

(New York)

Banks are beginning to protest over the new potential imposition of Basel capital rules which they say would make equity swap and borrowing transactions 4x to 5x more expensive than at present. Such transactions are massively important, as they are the mechanism which allow for investors to freely “short” certain stocks by selling in the market after borrowing them. Essentially, the banks do not want equity borrowings to be considered loans, as that would put them in a much riskier category for Basel III purposes, and mean that costs would skyrocket. The market for equity borrowing is quite large, with $760 bn of equities currently on loan in the market. The segment is a highly profitable one for banks, as it is an area where they can make hedged profits. Banks say the new rules would push equity borrowings into the shadow banking space and increase systemic risk.


FINSUM: This is a seemingly mundane but very significant story. Short-selling is considered a fundamental mechanism for fair market pricing, but if costs were to skyrocket, there would likely be much less of the activity.

(New York)

Even a casual onlooker has noticed that the art market is surging—valuations are very high, there are plentiful buyers, and the market is developing into a professionalised asset class. However, despite the high sales, major auction house stocks like Sotheby’s and Christie’s are suffering, with the former down from $53 in January to $41 today. Heavy criticism of Sotheby’s by Dan Loeb might explain the stock’s weakness, but other auctioneers, like Poly Culture Group, which is China’s third-largest house, has seen its share price fall 14% since its IPO in May. Evidently, there are two main issues driving the share price declines. Firstly, despite high sales prices, the houses make little on individual high-priced items—it is volume that is needed, and they have not been able to create that. Secondly, investors’ obsession with “scalability” has made the auction house model look less appealing as the companies always need to fight for the next item to sell, and physical spaces of auction mean only so much can ever be sold.


FINSUM: This is quite an interesting story on the stark divergence between the art market, and the businesses that drive it. Despite the former’s success, the latter is ailing.

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