Money market madness

This is an audio transcript of the FT News Briefing podcast episode: ‘Money market madness’

Marc Filippino
Hey, guys. We’re gonna get to today’s briefing in just a second. But first, I want to tell you about FT Edit. It’s an app for your iPhone and iPad that gives you access to eight of the FT’s best stories handpicked every weekday. The app’s editor serve up a perfect mix of politics, business and global news from our award-winning journalists, plus opinion pieces from our top columnists. The best part? You can try FT Edit today, completely free for 30 days, no obligation. Just head to the show notes for the link.

Good morning from the Financial Times. Today is Monday, March 27th, and this is your FT News Briefing.

[MUSIC PLAYING]

Cash is pouring into US money market funds. And crypto companies are heading to Hong Kong. Plus, the London Metal Exchange found out recently that some of the nickel in its warehouses wasn’t nickel.

Harry Dempsey
You know, there were supposed to be bags of nickel in there, but instead there were stones inside these bags.

Marc Filippino
And that was only the latest scandal to hit the market for this metal. We’ll tell you more about it. I’m Marc Filippino and here’s the news you need to start your day.

[MUSIC PLAYING]

The past two weeks, investors have shifted nearly $300bn into US money market funds. That’s according to data provider EPFR. It’s the biggest month for money market inflows since the depths of the Covid-19 crisis. It could be a sign of investor jitteriness of banks after the failure of Silicon Valley Bank and the smaller Signature Bank. To find out more, I’m joined by the FT’s Brooke Masters. Hey, Brooke.

Brooke Masters
Hey, Marc.

Marc Filippino
Do we know who is doing the shifting? Is it primarily wealthier Americans? Who is it?

Brooke Masters
It’s the bulk of the inflows are from what are described as institutional investors, which are probably companies and also very large individuals who come across as like a family office rather than normal people. But retail is moving as well. Basically what’s happening is everyone is moving into money market funds either because they are worried about their bank or because they just want the much better rates you can get from a money market fund.

Marc Filippino
Can we say for sure that it’s a response to the crisis in confidence of banks, or has this been something, I believe we actually talked about this a little while ago, that this has kind of been a trend for a bit?

Brooke Masters
There’s definitely been interest in getting higher returns on your cash. And so this was slowly, slowly happening. We’re seeing money seep out of the banking system into money market funds, which are not FDIC insured. They work slightly differently. They’re basically like a mutual fund that invests in very short-term government debt or commercial paper. But there was this massive spike in the last two weeks, like much, much bigger than we’d been having. So I think we can say it was sort of happening anyway. But this thing put it on steroids.

Marc Filippino
Who are some of the winners here?

Brooke Masters
JPMorgan Chase, Goldman and Fidelity are the three biggest winners, although Federated and Schwab and Vanguard are also seeing big inflows. And I think what all of those tell you is these are big and, you know, responsible, safe sounding institutions. So people are thinking, OK, I want to be attached to something that’s large.

Marc Filippino
What happens to these banks if they continue to see money get pulled out and put into money market funds?

Brooke Masters
This is a problem for particularly the midsized regional banks, which are getting the bulk of the outflows. Because the other thing we learned from data from the Fed is that there is also money leaving banks. It’s not just going into money market funds, but it’s coming from the smaller banks. When they don’t have deposits, then it’s harder for them to do the business of being a bank, which is make loans because basically they use deposits and lend them out to people and companies. And if they don’t have deposits, they can’t do it.

Marc Filippino
Brooke Masters is the FT’s US financial editor. Thank you, Brooke.

Brooke Masters
Thanks for having me.

[MUSIC PLAYING]

Marc Filippino
Senior officials from Britain and the EU have stepped up discussions on closer defence co-operation. London and Brussels recently inked a framework agreement on post-Brexit trading with Northern Ireland. That agreement may have helped pave the way for more defence co-operation. Britain is one of western Europe’s top two defence powers, along with France. Officials say the war in Ukraine has focused Brussels and London on the need for better co-operation on security matters and defence industry planning.

[MUSIC PLAYING]

The market for one of the world’s most important metals has been seriously tarnished. Just this year, two major scandals have hit nickel trading.

Harry Dempsey
And it’s raised a lot of questions about how sort of endemic fraudulent activity is in the metals industry.

Marc Filippino
The FT’s Harry Dempsey has been reporting on the nickel troubles. He joins me to talk more about the scandals and why they’re surfacing now. Hey, Harry.

Harry Dempsey
Hey there.

Marc Filippino
So last year, the FT reported on this huge crisis at the London Metal Exchange. The LME cancelled a bunch of nickel trades because of extreme market volatility. Now the exchange is facing all kinds of lawsuits because of it. What’s going on this year? Let’s start with the big metals trader, Trafigura.

Harry Dempsey
So, I mean, this year it’s gone from bad to worse for the nickel market. Trafigura unveiled a 577mn nickel fraud at the beginning of the year. They said they were the victim of a fraud that was perpetrated by Indian businessman, Prateek Gupta, who had used a network of companies. It would ask Trafigura to buy some of the metal, and then it would later buy it back from them. But during that period, Trafigura checked some of the containers, and inside was carbon steel, which is worth a 20th of the value of nickel. And then following on from that, a few weeks later, the London Metal Exchange said that it had found in one of its license warehouses, you know, there were supposed to be bags of nickel in there, but instead there were stones inside these bags. And so, again, it was just a further blow in the confidence in the LME.

Marc Filippino
Why are we seeing this all happening now, Harry?

Harry Dempsey
So I think there’s a few things going on here. One is nickel is the most expensive industrial metal. And the prices of it have been pretty high since the nickel crisis over a year ago. So if you are wanting to commit fraud, it’s a good thing to use because you’ll make a lot more money by replacing one tonne than you would if you used another metal like copper.

Marc Filippino
So do you get the sense that there’s always been fraud in the metals industry and we’re just kind of finding out about it now?

Harry Dempsey
My hypothesis on it is that as interest rates rise, it becomes far more expensive to hold metal in a warehouse rather than just consume it. So people don’t want to hold inventory. Be it, you know, if you’re a retailer, you don’t even wanna hold, you know, more stock of clothes because that will cost you more in a higher interest rate environment because holding stock consumes working capital and capital is more expensive when you have higher interest rates. And so because of that, I think some of the metal from the warehouses is coming out, which might have been sitting there for a long time and you don’t know what has been happening to it. While at the same time money isn’t free anymore. So, you know, if somebody was doing something nefarious, you could potentially cover it up by going to the banks and lenders and, you know, the credit checks weren’t as tight. So are we now seeing the tide recede? And we’re gonna basically find out who’s caught with their pants down.

Marc Filippino
So, Harry, I’m curious, how did these scandals impact businesses that use nickel? I mean, nickel is in everything. It’s in stainless steel products, it’s in electric cars. What do these scandals mean for manufacturers?

Harry Dempsey
So the big problem for anybody, be it a producer, a trader or a consumer of nickel is that when you have a volatile market and there’s low liquidity so people aren’t trading this thing, right, it means it costs a lot more money to try and protect against any risks of price spikes. And then ultimately, you know, if you have that sort of volatility for a commodity and you have an uncertainty over whether a pricing benchmark accurately reflects the real world and what’s happening, then banks will be uncertain about whether they want to finance new nickel projects. That’s a real concern because at the moment a lot of the car companies are saying there’s not enough sustainably produced nickel out there.

Marc Filippino
Harry Dempsey is the FT’s commodities correspondent. Thank you, Harry.

Harry Dempsey
Thanks.

[MUSIC PLAYING]

Marc Filippino
Before we go, the world’s largest cryptocurrency exchange, Binance, is advertising several job openings in Hong Kong. It’s part of a wave of crypto companies heading to Hong Kong to try and capture demand from mainland China. The city’s seen as more crypto-friendly than nearby Singapore. Officials there cracked down on crypto last year and are planning more regulation of the industry. Beijing also cracked down on crypto a couple of years ago, it banned all crypto activities. But traders there are still so busy that China remains the world’s fourth-largest crypto market.

[MUSIC PLAYING]

You can read more on all of these stories at FT.com. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.

[MUSIC PLAYING]