Market Turmoil Is Doing Central Bankers' Jobs for Them

Late last week, we published our FOMC meeting preview and discussed how our base case was for a 25bp rate hike if market conditions didn't deteriorate further. Since then, the US regional banking crisis has remained broadly unresolved, but the Treasury is now examining an extension of the FDIC deposit guarantee (Secretary Janet Yellen pledged intervention if needed) and the Federal Reserve itself boosted money market liquidity via higher-frequency USD swap line operations. In Europe, sentiment appears to be stabilising after markets digested the fallout of the UBS-Credit Suisse deal for some categories of bondholders (AT1, in particular). We recommend reading this note from our credit colleagues on the topic "Credit chaos: is the worst behind us?". Ultimately, two straight days of gains in global equities tell us that investors have indeed turned tentatively more optimistic about the financial turmoil.

In other words, even if it is still a close call, market conditions have – if anything – become slightly more favourable and a 25bp hike is our base case for today's FOMC announcement. We think such a move is not purely motivated by the inflation battle, but probably fits the need to send a message of confidence to the financial system. Pausing rates after having opened the door to a 50bp hike only a few weeks ago might be read as an emergency move and risks exacerbating market concerns about financial stability.

Markets have also moved closer to pricing in such a scenario as sentiment recovered and currently factor in around 20bp (or an 80% implied probability). If a 25bp hike is now a more widely expected outcome, markets will zoom their lenses on: a) financial stability assessment and tools; b) forward guidance, especially the dot plots. On this first point, a lot of focus will be on details about the new Term Funding Facility, fundamentally because this will re-build bond holdings into the Fed balance sheet, which may appear inconsistent with the Fed's quantitative tightening policy. When it comes to the dot plot, our economics team expects the FOMC median projections to signal a 5.4% policy rate for 2023, up from 5.1% from the December update. This could also have a symbolic value: signalling that the Committee is confident the banking crisis will be resolved and the inflation battle can return as the priority. Finally, it will be important to see how much Fed Chair Jerome Powell stresses how the current financial turmoil is by itself a tightening of financial conditions and can accelerate the disinflationary process.

In terms of the FX impact, we think there is room for the dollar to recover some ground on the back of a moderate hawkish surprise by the Fed. However, we are observing a gradual improvement in investor sentiment on the global financial situation – and especially in Europe – which makes us tilt to a bearish short-term bias in the dollar. That is, naturally, highly conditional on no further setbacks in the ongoing banking crisis – which is a big caveat.

A soft ZEW print yesterday was not enough to halt the good EUR/USD momentum, which boils down to European equities' outperformance versus US stocks as well as the general improvement in risk sentiment. We are observing how markets are returning to some pro-cyclical European currencies to the detriment of those Asian G10 currencies (JPY, AUD, NZD) that appeared as safe havens last week.

We think that today's FOMC announcement can trigger some recovery in the dollar, and therefore see mostly downside risks for EUR/USD. At the same time, regulators' efforts to contain the adverse side-effects of the UBS-CS deal for some bondholder categories appear to be yielding some positive effects for European sentiment, and possibly means that the balance of market concern is now tilted to the US given the still unresolved regional banking crisis. Beyond the FOMC impact, we think there is room for a break above 1.0800 in the near term as long as sentiment continues to stabilise.

The European Central Bank is playing a role in this, by staying rather hawkish on monetary policy while opening the door to deploying financial stability tools. There are a lot of speakers today, as the ECB holds a conference in Frankfurt: President Lagarde, Chief Economist Philip Lane, and then members from all parts of the dove-hawk spectrum. Still, the impact on the euro may ultimately be small given the proximity to the FOMC announcement. There are no market-moving data releases to flag in the eurozone calendar today.

On Monday, we had called for a break higher in EUR/GBP as we deemed the recent resilience in the pound versus the euro as hardly sustainable. The pair traded close to 0.8850 yesterday but dropped back below 0.8800 this morning after a surprise acceleration in UK inflation. Headline CPI year-on-year rose from 10.1% to 10.4%, defying expectations for a drop below 10.0%. Core inflation also accelerated, from 5.8% to 6.2%.

This morning's data – along with the tentative recovery in market sentiment - reinforces the prospect of a Bank of England rate hike tomorrow (which is also our base case). Still, our economics team still deems a May pause as highly likely, and we continue to see the direction for EUR/GBP as bullish over the coming weeks.

Yesterday's prints from Poland finished the monthly set of data confirming the weak economy. Today we will see only consumer confidence in Poland while in the Czech Republic, the Ministry of Finance will test the primary bond market for the first time since the recent rally to see whether Czech bonds are still attractive with yields well below 5%.

The FX market in the region yesterday confirmed the positive sentiment coming from the core market, supported by a higher EUR/USD. The rally led by the Hungarian forint and the Czech koruna will follow a further decline in risk aversion, in our view. However, the Fed and a stronger US dollar may be a drag on the EM recovery in the days ahead. Even so, we should see further gains in the CEE region. In our view, the Hungarian forint should settle below 390 EUR/HUF and the Czech koruna below 23.75 EUR/CZK. The Polish zloty and Romanian leu are likely to continue to stagnate at current levels and as we mentioned earlier, this part of the region will have to wait for a stronger move higher in EUR/USD.

With a 25bp hike 80% discounted there is a green light for the Fed to go ahead and deliver that. It's unlikely the Fed will provide much guidance for the May meeting though, but it's also unlikely we get a so-called dovish hike. The Fed needs to keep some form of pressure on. The big take-away is likely to come from the press conference, which should include lots of questions on the banking system, and the (emergency) measures already employed to secure it.

There will be a keen ear to any commentary from Chair Powell on the new Term Funding Program. The terms on this facility are so good that a significant take-up is quite probable. Initially there may be reluctance to take advantage, so as to avoid raising red flags on individual names. But names will not be published, and once volumes build, more and more (mostly smaller) banks will likely use the facility. Note that this will re-build bonds on the Fed's balance sheet. Not quite quantitative easing, but going in the opposite direction to the quantitative tightening process that's ongoing (through allowing redeeming bonds to roll off the front end at a pace of US$95bn per month). Meanwhile, there is still some US$2tn of liquidity going back to the Fed through the reverse repo facility, the counter of which shows up in lower excess reserves than there would otherwise be. In fact, falling deposits in the banking system generally is reflected here too, with many such deposits showing up in money markets funds, and from there into the Fed reverse repo facility.

Directionally we doubt there is huge room to the downside for market rates, especially given the virtual collapse seen in the past week or so. That said, further falls in the near term are entirely possible should the banking story deteriorate further. But so far the banking issues are more idiosyncratic than systemic, and a system breakdown has become far less likely in the wake of the extraordinary deposit support announced by the Fed in the wake of the Silicon Valley Bank collapse. Plus, delivery of a 25bp hike still means the Fed is tightening, there is likely at least another hike to come. In the background we envisage a medium-term fed funds rate equilibrium at 3%, so long rates should not really be shooting below this, barring exceptional circumstances. There is in fact a probable scenario where longer dated rates are under rising pressure, even as the front end ultimately sees pressure for lower rates later in 2023. The inflation issue remains a significant one, and any let-off through interest rate cuts, or even the discount thereof, would leave longer rates less protected from residual medium-term inflation risks.

The stabilisation of various banking stress and broader financial market indicators has put markets back on alert for more monetary tightening. In Europe, the swap curve is implying a terminal deposit rate around 3.25%, only 25bp higher than the current rate. This compares with our (pre-banking crisis) call for a 3.50% peak, and market pricing of around 4% just two weeks ago. Clearly, the world has changed since then, but European Central Bank (ECB) officials have, in recent days, implied that more tightening will be required. In some instance, this took the form to oblique references to too high inflation. In other cases, of a direct rebuttal of markets pricing a terminal rate under 3.25%.

The ECB's Watchers conference today should be an opportunity for governing council members to drive the message home. ECB Supervisory Board chairman Andrea Enria's parliament hearing yesterday seemed to suggest the central bank sees it as its base case that no further contagion will occur. We surmise that as time passes with no further lapses in banking stability, the central bank will progressively become more confident in its ability to deliver further hikes. The question is how many.

Using the previous peak in Estr forwards as a guide, we think the curve can at least price one more 25bp hike than currently, which would take us to June, in line with our earlier call. Even 50bp would not be a surprise at all. Based on recent trading relationships, this should translate one-to-one into 2Y yields, and roughly half of that should be reflected into 10Y yields (a little more for Bund, a little less for swaps). This should put 2Y German yields above 3%, and 10Y above 2.5% (equivalent in 10Y swaps of 3.2%) in case of further hawkish re-pricing, with 2.80% and 2.40% realistic short term forecast for 2Y and 10Y yields respectively. This, of course, is subject to no further banking contagion, and provided the Fed presses ahead with its own hike at this evening.

There is a full roster of ECB speakers at the ECB Watchers conference in Frankfurt, culminating with speeches from Chief Economist Philip Lane and board member Fabio Panetta, both leaning dovish to varying degrees. Should they (Lane most likely) endorse further hikes, this would reinforce the impression that hawkish thinking still dominates ECB deliberations.

Bond supply today consists in 4Y gilts and 10Y Bund. Data consists in eurozone current account balance.

The minutes of the Bank of Canada will be released, although this will quickly be eclipsed by the Fed's FOMC meeting (which is one hour earlier for European watchers as the US has already switched to summer time). We've pencilled in a 25bp hike provided no further signs of contagion.

Having seen European and U.S. markets post their second successive day of gains yesterday, on optimism that the recent turbulence in the banking sector has been managed, market attention appears to be settling back towards inflation, as well as the outlook for further rate hikes from central banks.

The rate outlook has shifted markedly in the past couple of weeks from how many more we are likely to see, to how many more can be sustained before something else breaks, in light of recent events.

The next 36 hours will see the latest UK inflation numbers for February, as well as key interest rate decisions from the Federal Reserve, Swiss National Bank, and the Bank of England.

Starting with the UK CPI numbers for February, the decline in energy prices has offered some respite to hard-pressed consumers in recent months, most notably at the petrol pumps.

The onset of spring and warmer weather could also offer some relief, however, at the last set of CPI numbers in January, headline inflation fell to 10.1%, while core prices also fell back from 6.3% to 5.8%.

While this is welcome it is little comfort given that food prices have continued to rise sharply, and remain eye-wateringly high, rising 16.7% in January.

One other thing that we also know about inflation in the UK is that it goes up quickly and comes down slowly, and with wage inflation also rising it is likely to remain sticky.

It's also important to remember that it is still 5 times higher than the Bank of England's 2% target, even if we are seeing some predictions that it could fall back to 2% by the end of this year. Expectations are for headline inflation to fall to 9.9% and core prices slip to 5.7%, but even if we do see a weaker than expected reading, a base rate of 4% barely seems adequate to act as a drag on this measure of price rises and will still increase the pressure on the Bank of England to hike by 25bps at the very least tomorrow.

To hike or not to hike, that is the question that will dominate risk sentiment today when the Fed gets set to make a decision on rates in the shadow of a banking crisis that does appear to be all intents and purposes in the rear-view mirror.

Before recent events around the collapse of Silicon Valley Bank, Signature Bank and latterly the problems around First Republic Bank and the rescue packages that have followed, the calculus around this week's Federal Reserve rate decision was a simple one, namely whether to raise rates by 25bps or go by 50bps.

Even without the intervention of the recent crisis in smaller U.S. banks, 50bps wasn't really a viable option, but the sharp selloff in U.S. banks, and the ensuing volatility of the last few days has changed the equation amongst some investors, with some arguing for a pause, as well in a minority of cases for a rate cut.

At this point a rate cut is a ridiculous notion and would send the completely the wrong message at a time when optics are everything. If the Fed does have concerns about some parts of the U.S. banking sector, why weren't they apparent 3 weeks ago when they were pushing the case for keeping a 50bps rate hike on the table? Ultimately a rate cut could prompt further volatility, prompting a market freak out in that the situation could be far worse than realised.

Even a pause has the potential to be unsettling given Powell's recent comments to U.S. lawmakers which showed the Fed is becoming increasingly concerned about rising prices. He might be able to make it fly if he made it clear that hikes would resume once the picture becomes clearer, and that we aren't about to feel any aftershocks, but it might be a tough sell. Even with the choppiness caused by recent events the view on sticky prices is unlikely to have changed much, given the strength of some of the recent economic numbers.

The biggest challenge will be whether or how much the FOMC sees fit to raise its dot plot guidance when it comes to the number of rate hikes to expect over the rest of this year in light of recent economic data. How Powell manages market expectations at his press conference, especially with respect to how events have affected today's decision will be as equally important as the decision itself.

A rate hike of 25bps still seems the most probable outcome, with the bigger risk being that he overcompensates after the market's buoyant reaction to his February press conference, and negative reaction to his testimony to U.S. lawmakers.

Powell needs to steer a middle ground. Minneapolis Fed President Neel Kashkari has always maintained a terminal rate of 5.4% is his base case and market estimates did briefly move up to those levels earlier this month, although we have since fallen from those peaks.

Inflation is now starting to fall back, even as core prices remain sticky. The recent volatility has seen markets start to price in rate cuts later this year, although this could change if things continue to calm down.

If inflation remains sticky, and things settle down then the rate cuts that are starting to get priced in for this year could well get priced out again just as quickly. Let's not forget the Fed is still nowhere near its 2% target, and that's something the markets haven't yet come to terms with.

EUR/USD – has continued to edge higher, pushing above last week's highs and towards 1.0800. A move through 1.0800 could retarget the recent range highs at 1.1030. Still have support at recent lows at 1.0520.

GBP/USD – failed just shy of 1.2300 yesterday and feels vulnerable to a slide back towards 1.2000 with a failure to push above this key resistance. Still has solid support at 1.1800 with a break targeting the 1.1640 area.

EUR/GBP – strong rebound off trend line support from the lows last August yesterday at 0.8720 and has pushed back above the 0.8820 area. Further gains could see a move towards 0.8930. Support now at 0.8780.

USD/JPY – seen a solid rebound off cloud support this week, now currently at 131.05, with the main resistance still up near the 200-day SMA at 135.90. A break of 130.00 targets the 128.00 area.

As the mood in the financial markets seems to be rather upbeat, Asian markets are riding the wave of positivity, tracing the upward trajectory set by their U.S. counterparts. All eyes are on FOMC rate decision today, with most expecting a 25 basis point increase. However, uncertainty lingers as opinions within the market remain divided on what next for Fed. Market participants are eager to hear from Fed Chair Jerome Powell during today's press conference, hoping for clarity on future policy direction, though doubts persist about how much reassurance he can provide.

The currency markets have witnessed Euro taking the lead as the week's strongest performer, followed closely by Swiss Franc and British Pound. Sterling's performance will hinge on the release of today's CPI data and BoE rate decision tomorrow. Meanwhile, the Swiss Franc will turn its attention to SNB rate decision scheduled prior to the BoE's announcement. Although commodity currencies show signs of recovery, they remain at the bottom of the performance chart. Dollar is currently exhibiting mixed results, faring slightly only better than Yen, Aussie, and Kiwi.

On the technical front, market-watchers are keen to see if Euro can maintain its momentum and extend this week's robust rally. The surges past 1.0759 resistance in EUR/USD and break of 1.4780 resistance in EUR/CAD were bullish indicators. However, EUR/AUD encountered resistance at 1.6200, and EUR/GBP is grappling to surpass the 0.8842 minor resistance. Euro's strength will be put to the test as it seeks to solidify its position in the markets.

In Asia, at the time of writing, Nikkei is up 1.93%. Hong Kong HSI is up 1.88%. China Shanghai SSE is up 0.08%. Singapore Strait Times is up 1.50%. Japan 10-year JGB yield is up 0.319 at 0.724. Overnight, DOW rose 0.98%. S&P 500 rose 1.30%. NASDAQ rose 1.58%. 10-year yield rose 0.125 to 3.606.

Today marks a significant moment as Fed is expected to continue with its tightening policy. Amid the recent banking crisis and market turmoil, it is widely anticipated that Fed will raise interest rates by 25bps to the 4.75-5.00% range, with around 85% probability. Fed Chair Jerome Powell is likely to stress the importance of bringing inflation back on target during the post-meeting conference, while acknowledging the current market turbulence.

The Fed's future rate path remains a hot topic of debate. According to Fed fund futures pricing, there is over 55% chance of an additional 25 basis point hike in May, bringing the interest rate to 5.00-5.25%. However, this is followed by a over 62% probability of a -25 basis point cut in June, reverting the rate back to 4.75-5.00%. This apparent contradiction reflects the divided opinions on whether there will be another rate move in May. But in more certainty, traders seem to be leaning more towards a rate cut in September, with around 75% chance of interest rate falling back into the 4.50-4.75% range.

The new staff economic projections scheduled for release today were initially expected to provide some clarity on the future rate path. However, it is speculated that the Fed might choose to delay or suspend these projections, as it did in March 2020 during the onset of the pandemic, to avoid creating further confusion. As a result, a clear answer to the future rate path may remain elusive for now.

· Suderman Says: To Raise Rates or Not, Fed Walks a Tightrope

· Fed Faces Dilemma, Hit Pause or Keep Raising Rates?

· Fed Meeting Preview: Dollar Index at 1-month Low ahead of Tight Decision

· Fed to Go Ahead with 25 bp Hike; Canadian CPI Growth to Slow

· Fed Preview – Rate Hikes Continue Despite the Volatility

· March Flashlight for the FOMC Blackout Period: The Flashlight Needs Fresh Batteries

Australia's Westpac Leading Index rose slightly from -1.04% to -0.94% in February, but it still marks the seventh consecutive month of negative growth rate, pointing to below-trend growth over the next 3-9 months. This is in line with Westpac's forecast that growth in the Australian economy will be only 1% in 2023.

The slowdown reflects the lagged effects of rising interest rates, a deep shock to real wages, a bottoming out of the savings rate, and falling house prices. Westpac also expects the weakness to extend into 2024, with more negative readings likely.

RBA indicated in its March minutes that the board intends to consider a pause at its April meeting. However, Westpac does not expect that a decision to pause in April will mark the end of the cycle. It expects new information for the May meeting to indicate the need for a further response from the board, with a final 0.25% increase in the cash rate in May marking the end of the tightening cycle.

New Zealand's Westpac McDermott Miller Consumer Confidence Index rose slightly by 2.1 points to 77.7 in March, but still remains well below the long-term average of 108.8. The President Conditions Index and the Expected Conditions Index also increased, but are still far below their long-term averages of 106.1 and 100.6, respectively.

Despite the slight uptick in confidence, Westpac notes that households across the country continue to grapple with the increasing costs of living, higher mortgage rates, and a downturn in the housing market. The Expected financial situation has improved, but remains negative at -3.8, while the 1-year economic outlook has only slightly improved to -41.1, and the 5-year economic outlook has dropped to -10.8.

The mounting financial pressures are already affecting household spending, and as they become more pronounced, Westpac expects to see an increasing number of households winding back their spending over the next year. This weakness in consumer confidence could have significant implications for the overall economy, as household spending is a major driver of economic growth.

UK inflation data will also be watched closely in European session, with CPI, RPI and PPI featured. Eurozone will release current account. Canada will publish new housing price index.

A scramble by troubled U.S. lender First Republic Bank to secure a capital infusion kept worries about the broader banking sector alive on Wednesday as authorities considered steps to further strengthen financial stability.

While recent market turmoil has eased, the Federal Reserve's meeting later in the day is now a major focus for investors, with traders split over whether the U.S. central bank will be forced to pause its hiking cycle to ensure financial stability.

The Fed's relentless rate hikes to rein in inflation have been partly blamed for sparking the biggest meltdown in the banking sector since the 2008 financial crisis.

The collapse of Silicon Valley Bank, which sank under the weight of bond-related losses due to surging interest rates, kicked off a tumultuous 10 days for banks which culminated, for now, in the 3 billion Swiss franc ($3.2 billion) Swiss regulator-engineered takeover of Credit Suisse by rival UBS on Sunday.

The wipeout of Credit Suisse's Additional Tier-1 (AT1) bondholders has sent shockwaves through bank debt markets, and some Asian lenders may find it difficult to replenish their capital by issuing AT1 bonds, Citigroup said in a research note on Wednesday.

And worries over the health of mid-sized U.S. lenders linger, particularly First Republic.

For now, Credit Suisse's rescue appears to have assuaged the worst fears of systemic contagion, boosting shares of European banks and U.S. regional lenders.

The S&P 500 banks index rallied 3.6%, its largest one-day gain since November.

However, First Republic's efforts to secure a capital infusion continued without success on Tuesday, as the troubled regional lender started to plan for the possibility it may need to downsize or get a government backstop.

That sent shares of First Republic tumbling 9% in extended trade on Tuesday evening, having surged as much as 60% and closing regular trade up 30%. First Republic has shed 80% of its market value this month.

The San Francisco-based bank is looking at ways it can downsize if its attempts to raise new capital fail, three people familiar with the matter told Reuters. JPMorgan Chase has been helping the bank find new sources of capital after a $30 billion injection of deposits from big banks failed to stem fears over its viability.

The scenarios were being discussed as major bank chief executives gathered in Washington for a scheduled two-day meeting starting Tuesday, sources familiar with the matter said.

Among options was the possibility the government could play a role in lifting assets out of First Republic that have eroded its balance sheet, Bloomberg News reported on Tuesday, citing people with knowledge of the situation.

Policymakers from Washington to Tokyo have stressed the current turmoil is different from the crisis 15 years ago, saying banks are better capitalised and funds more easily available.

Still, Australia's prudential regulator has started asking the country's banks to declare their exposure to startups and crypto-focused ventures following the collapse of Silicon Valley Bank, according to the Australian Financial Review.

U.S. Treasury Secretary Janet Yellen said the country's banking system was sound despite recent pressure.

Deputy Treasury Secretary Wally Adeyemo said a review of the failures of Silicon Valley Bank and rival Signature Bank was in order.

"It's ... important that we review the failures of the two banks in question to ensure we have a set of rules and procedures for the banking system that continues to protect our economy and depositors across the country," Adeyemo said on Tuesday at an event hosted by the U.S. Hispanic Chamber of Commerce.

"We of course continue to monitor the current situation and consider what steps can be taken to further strengthen America's financial stability," he said, without elaborating.

Political pressure continued to grow in the United States to hold bank executives accountable. The Senate Banking Committee's chairman said the panel will hold the "first of several hearings" on the collapse of SVB and Signature Bank on March 28.

($1 = 0.9280 Swiss franc)

The London Metal Exchange (LME) has discovered that some of its registered nickel is missing.

Nine warrants, equivalent to 54 tonnes, have been declared invalid after being found to be "non-conformant with the contract specifications", the LME said in a March 17 notice.

What should have been bags of nickel briquettes grading at least 99.8% pure metal have turned out to be bags of stones.

The incident comes one month after Trafigura took a $577 million charge against cargoes of nickel that turned out to be steel. The trading company alleges "a systematic fraud" and is pursuing legal action against companies associated with Indian businessman Prateek Gupta. A spokesperson for Gupta has said that they were preparing "a robust response" to the allegations.

The latest incident also comes almost exactly one year after the LME suspended nickel trading and cancelled trades, a fateful decision that has generated a slew of lawsuits from disgruntled fund players and an unprecedented enforcement investigation by UK regulators.

The LME, owned by Hong Kong Exchanges and Clearing, seems to be cursed by the devil's metal.

It's not the first time that LME nickel stocks have been in the legal limelight but previous scams, such as one which resulted in a courtroom tussle between Natixis and Marex after the unravelling of a repo deal in 2017, were based on false receipts.

This one seems to be a much more basic deception and one which raises serious questions about the controls at the warehouse operator in question.

LME rules stipulate that all metal placed on warrant must be weighed, a requirement that is particularly important if the metal is bagged and can't be visually checked for any irregularities.

It is clearly also in the warehouse operator's own interest not to accept anything which isn't what it seems, particularly a metal that is currently valued at $22,750 per tonne.

Bags of stones shouldn't pass any inspection, whether at original load-in or during the annual audit of registered stock required by the LME's warehousing agreement.

Access World has confirmed to Reuters the fake nickel was located in one of its sheds in Rotterdam. The company "is currently undertaking inspections of warranted bags of nickel briquettes at all locations and will engage external surveyors to assist," it said.

Access was owned by Glencore until January, when it was sold to Global Capital Merchants.

The LME has required every other warehouse operator to check its nickel and advised holders of off-warrant stocks to do their own inspections, if they haven't already after the Trafigura revelations.

So far at least, there is nothing to suggest that this wasn't a one-off incident, affecting just 0.14% of live LME nickel stocks, according to the LME.

The LME, it is worth noting, does not itself own or operate warehouses for the storage of warranted metal but rather licences approved operators.

Warehouse companies seeking LME approval must meet a host of capital adequacy, insurance and detailed operating qualifications. They must also allow routine inspections by exchange staff to inspect warranted metal.

LME registration is therefore something of a gold standard for metals warehousing, which is why the exchange can boast of over 500 facilities across 32 locations in Asia, Europe and the United States.

Or at least it was.

While we wait to find out exactly how 54 tonnes of nickel were replaced with stones, the reputational damage to the LME's storage system has already been done.

The LME may not own or operate any sheds but it is the front-line regulator of its warehousing system.

Deliverability lies at the heart of the LME's price discovery role and good warehousing practice is critical to maintaining an orderly market.

It's a point the exchange has repeatedly underlined in past clashes with warehouse operators over long load-out queues, which disrupted the relationship between LME and physical market pricing.

An isolated incident at one particular warehouse wouldn't at any other time have much impact on the LME's broader reputation.

But it folds into the bigger issues around the exchange's governance and regulatory capacity after the blow-out of the nickel contract this time last year.

The latest scandal will also intensify the question of whether the LME nickel contract is fulfilling the function of efficient price discovery forum.

The mismatch between the LME's Class I refined nickel contract and the new flows of nickel chemicals feeding the electric vehicle battery sector were a root cause of last year's market mayhem.

The big short in the market, China's Tsingshan Group, may be the world's largest producer but not in a form it could deliver against its positions on the LME.

The nickel market was already looking for different pricing solutions before the March 8, 2022 suspension of LME nickel trading. The subsequent collapse in activity has fuelled the debate.

Average daily volumes on the LME contract were 34,613 lots in February, down 58% on February 2022, the last full month of trading before the March breakdown.

The LME is hoping that the restoration of trading in Asian hours will revive flagging activity.

The first attempt was blocked in January by Britain's Financial Conduct Authority (FCA) due to concerns about the LME's ability to maintain market order.

It finally got the go-ahead to extend hours on March 20, a date which has just been pushed back a week to next Monday so everyone can check their nickel, particularly if it's bagged.

The LME already had a mountain to climb to rebuild trust in its nickel contract. The mountain has just grown by another 54 tonnes of stone.