Base metals pricing not in high levels of event risk due to low volatility

Low volatility in base metals means markets have not been pricing in high levels of event risk, said Barclays Capital in a commodities snippet.

According to Barclays, on average, base metals are down only 5% so far this year, compared to 15% for West Texas Intermediate crude. Metals have been trending more than many commodities, reflecting reduced participation by some market sectors such as macro hedge funds, commodity index investors and consumer hedging.

Subsequently, there has been a gradual decline in volatility with front month at-the-money implied copper volatility trading at 23%, down from an average of close to 40% in the fourth quarter. Yet, the event risk is extremely high, they added.

Downside risks include a Greek exit from the eurozone, more banking stress or eurozone disharmony, a hard economic landing in China and further slowing of U.S. growth. [ News Source ]

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