Commodities slump as Warsh nomination and margin hikes spook markets
Gold, silver, oil and industrial metals fell sharply after Kevin Warsh’s nomination to lead the U.S. Federal Reserve and higher futures margins prompted heavy selling.
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By Torontoer Staff
Commodities tumbled on Monday, led by steep losses in gold, silver, oil and industrial metals after President Donald Trump nominated Kevin Warsh to lead the U.S. Federal Reserve. The move, combined with a rise in futures margin requirements, forced selling across precious-metal and energy markets and helped push global stocks lower for a third straight day.
Investors put pressure on other assets to cover losses in metals, contributing to broad declines. MSCI’s All-World index fell 0.5 per cent on the day and was down 1.5 per cent since its record high on January 27, while the VIX volatility index edged toward the 20 level, a commonly watched threshold for elevated market stress.
What moved the markets
Markets reacted to Mr. Warsh’s nomination because he is seen as more hawkish than some expected. That shifted expectations for U.S. monetary policy away from another round of aggressive easing, lifting the dollar. A stronger dollar makes dollar-denominated commodities more expensive for holders of other currencies, reducing demand and contributing to price declines.
Gold slid about 5 per cent on Monday to its lowest level in more than two weeks, while silver fell more than 7 per cent. On Friday, spot gold had recorded its steepest one-day percentage drop since 1983, falling more than 9 per cent, and silver plunged about 27 per cent in its largest daily decline on record.
Impact across markets
Oil prices dropped nearly 5 per cent from recent multi-month highs, and London Metal Exchange copper lost about 3 per cent. Other commodities were weaker as well. Tokyo rubber fell nearly 3 per cent, while Chicago wheat and soybeans were down around 1 per cent. Basic resources stocks led losses in Europe and Asia on Monday.
U.S. equity indices closed lower on Friday after the nomination. The Dow Jones Industrial Average fell 0.36 per cent, the S&P 500 lost 0.43 per cent, and the Nasdaq Composite slipped 0.94 per cent.
Margins and forced selling
Selling in precious metals accelerated after CME Group raised margin requirements for metal futures, effective from Monday’s market close. Higher margins increase the capital needed to hold positions, dampen speculative participation, reduce liquidity and can prompt traders to unwind positions quickly.
The scale of the unwind unfolding in gold today is something I haven’t witnessed since the dark days of the 2008 global financial crisis.
Tony Sycamore, IG market analyst
Forced selling can intensify moves that begin for policy or macroeconomic reasons, amplifying losses and widening volatility across related asset classes.
Energy and industrial metals pressures
Energy markets were also affected by signs of de-escalation in U.S.-Iran tensions. Comments from President Trump that Iran was "seriously talking" with Washington, along with reports that Iran’s Revolutionary Guards were not planning live-fire exercises in the Strait of Hormuz, helped ease some conflict concerns and removed support from oil prices.
Industrial metals faced demand concerns ahead of China’s Lunar New Year holiday, which begins on February 15. Traders expect lower end-user activity and thinner transactions in the run-up to the break, and inventories for some metals are elevated. Copper and iron ore were under particular pressure for those reasons.
A hawkish Fed signals interest rates will stay higher for longer, supporting the dollar and raising the opportunity cost of holding gold and silver, dimming their appeal.
Vivek Dhar, commodities strategist, Commonwealth Bank of Australia
Dhar said he still views the recent moves as a correction and maintained a bullish long-term view, sticking with his gold price forecast for later in the year.
Outlook for investors
Market participants are weighing whether the sell-off marks a structural shift or a sharp correction. Elevated volatility suggests traders will remain cautious in the near term. Policy signals from the U.S. Fed, dollar strength and any further changes to futures margining are likely to determine near-term direction for commodities.
For now, the move has closed out speculative positions and forced reallocations across asset classes. Traders and institutional investors will be watching incoming economic data and central bank commentary for clues on how persistent the shift in sentiment will be.
Markets opened the week with heightened uncertainty. The combination of a politically sensitive Fed nomination, higher capital requirements on futures and easing geopolitical risk left many commodity prices lower and volatility higher, at least for the short term.
commoditiesmarketsgoldKevin WarshFederal Reserve
