NEW YORK —Morgan Stanley says the writing’s on the wall for warehouse trades. Two things have allowed massive amounts of metal to build up in London Metal Exchange-licensed warehouses: low interest rates and the exchange’s warehouse rules.
Both factors are on their way out, Morgan Stanley said in an analyst note Monday, so “the long-awaited demise of inventory financing deals in a number of LME-traded metals appears to have arrived.”
Cheap financing allowed banks and commodity traders to borrow money at little to no cost while benefiting from the gap between low immediate-delivery prices and higher futures prices. Traders would use borrowed money to purchase metal on the physical market, put it into a warehouse, and sell it at a higher price on the futures market, locking in a risk-free profit.
