Details are in the works for the launch of the first aluminum-backed exchange-traded fund, the Wall Street Journal reported Monday.

Though Glencore International, the world's biggest commodity trader, and Credit Suisse Group are still looking for both an ETF provider and regulatory approval, the new ETF is said to reflect growing interest in physically backed commodity products in the face of looming stricter U.S. regulation in the futures markets.

Abundant supplies of aluminum following a drop in demand associated with the economic downturn is also encouraging the creation of the ETF as a way to help soak up some of that supply and keep prices firm.

Recently, the price of aluminum on the London Metal Exchange has soared, trading some 50 percent higher than the seven-year lows it hit earlier this year, and though some analysts see further growth ahead, the massive inventory overhang could pose a threat to those gains. In fact, LME aluminum stocks are at record-high levels in warehouses across the globe, and that aluminum will eventually need to be absorbed by buyers.

It's not clear where the ETF will be listed, but some sources suggest it might happen on the Swiss and German exchanges.

Metals-backed ETFs have significant influence in their underlying markets, the Globe and Mail said Monday. Glencore is a large holder and trader of aluminum, and it has partnered with Credit Suisse before.

You can read the full Wall Street Journal story here.

You can read the full Globe and Mail story here.

You can read a HardAssetsInvestors.com in-depth feature on the aluminum market here.

The global financial crisis is drying up the financing that firms depend on for trade. That's making the global recession nastier and deeper than it otherwise would be.

As with all kinds of credit these days, financial institutions are making less trade finance available and charging more for it. But the squeeze in trade stands out because it pinches otherwise healthy companies that should be driving a recovery in global commerce. Already, the World Bank predicts trade will contract next year for the first time since 1982.

The Deteriorating Trade Outlook

Here's the IMF's recent forecasts for exports -- from October and then November -- for world trade, disaggregated into advanced and developing country groupings.

These developments in trade financing suggest that the recent drop-off in US exports and imports might be due only in part to macroeconomic factors. In particular, I suspect that some of the precipitous decline in US non-oil imports is driven by difficulty in obtaining financing. Similarly, for US exports.

The article continues:

Despite better growth prospects in developing countries, many lenders are pulling back drastically from these regions. The institutions are cutting exposure to economies traditionally perceived as more risky in order to patch up holes in their balance sheets. Other big players in trade finance, such as Wachovia, have disappeared.

"For emerging markets, the deleveraging process is extensive, and dollar sources have dried up," says Hung Tran, an economist at the Institute of International Finance, a Washington association of international financial firms.

Dating back to ancient commercial hubs such as ninth-century Baghdad, trade finance is the collection of hard-currency credit lines, insurance policies and guarantees that allows firms in different countries to do business with each other. It's the oil that lubricates $14 trillion of global trade.

"The trade-finance business globally is under significant stress," says John Ahearn, the global head of trade finance at Citigroup, one of the world's biggest trade-finance sources. Some repricing is expected as the globe readjusts from a period where credit flowed too freely. "We are coming out of an incredibly benign credit environment when trust levels were too high," says Stuart Nivison, head of trade and supply chain at HSBC Holdings.

Even big lenders such as Citigroup and HSBC that have expanded international credit lines to some markets recently are hitting obstacles. A big part of these banks' business is setting up trade lines that are offloaded to smaller banks in a secondary market. These days, however, the smaller banks aren't buying.

Consider what's happening in Brazil, an emerging export power that sells the world everything from soy and beef to iron ore and jets. Brazilian companies need dollar-denominated credit to finance the sales. The cost of these credit lines -- the bread and butter of trade finance -- has soared, doubling in many cases. The phenomenon hits smaller firms the hardest: Some no longer qualify for the lines and others are squeezed out of shrinking market by credit-hungry giants like state oil company Petroleo Brasileiro.

...

At times, credit is available, but the higher cost of it exceeds the profit margins, so the deals collapse. That's especially the case in commodities transactions.

By the way, the spike up in the value of the dollar (represented in the downward movement in the USD exchange rate), while often mentioned in journalistic accounts, is unlikely to have had a big impact in the September and October figures, given the lags usually estimated in trade flow equations (for a discussion of lag lengths, see this paper [pdf]).

The observed co-movement is ascribable to the common factor of flight to safety and reduction in trade credits in the wake of the financial crisis (see some stunning pictures in Brad Setser's recent post).

China

Other coverage is in Globe and Mail, Journal of Commerce, Reuters, Bloomberg. Many of the articles focus on China, and we now have some feeling for the combined macro/finance impact: "According to Chinese customs figures, Chinese exports declined 2.2% and imports fell 17.9% in November, compared with a year earlier." (Volz in FEER.) This suggests to me that the more rapidly the supply of export credit can be restored (at least partially), the less significant the downturn in Chinese exports, and hence in the Chinese economy.

From Reuters:

Stunningly bad trade figures from China underlined the problem. China had been expected to show double digit growth in trade last month as compared to November 2007, but the data showed exports falling 2.2 percent from a year ago and imports down 17.9 percent.

"Global demand for Chinese products is vanishing," said Gene Ma, an economist at China Economic Monitor, a Beijing consultancy. "Secondly, the credit freeze in importing countries has made it hard for Chinese exporters to sell abroad. I heard some Chinese exporters had to cancel shipments as they were worried about getting paid by their buyers."

Chinese banks have been very nervous about accepting letters of credit from abroad, making it tougher for imports to China to get the needed financing. China and the U.S. pledged $20 billion to fund trade with developing countries last week, but that is a tiny balm for a huge market.

Some Disparate Observations

In some previous posts, I observed that globalization was a function of trade -- and other transaction -- costs [1], [2], [3]. That observation was focused on transportation costs, but it's clear (in retrospect) that one of the drivers of globalization was decreasing financing costs. With financing costlier for the foreseeable future, secular growth in trade flows may be even more muted than one would expect from the slowdown in global GDP.

There is a good news/bad news aspect to this conclusion. The bad news is that decreased international trade means a reduction (relative to counterfactual) in the gains from exploiting comparative advantage. This will show up in further reduced GDP.

The good news, such as it is, is that reduced import penetration in the developed economies will mitigate protectionist tendencies. In addition, higher transactions costs (due to higher financing costs) will likely act to reduce the marginal propensity to import, thereby boosting the Keynesian multiplier (as described by me, and Dani Rodrik) in a way that will not induce retaliation. Of course, the net effect is still likely to be toward greater protectionism.

Technorati Tags: imports, exports, trade credit, credit crunch, and protectionism.

A lot of investors have been waiting for a bottom in gold mining stocks. With gold prices having stabilized in the $700+/ounce range, gold mining stocks look like downright bargains. Today, Michael Kahn at Barron's says that gold mining stocks and the Market Vectors Gold Miner's ETF (NYSEArca: GDX) may have put in a technical bottom last week. The fund closed yesterday right at its 50-day moving average. A jump above that market would be a very bullish signal.

Read the full article here.

Romey: More Advisors Should Switch To ETFs

Good press has been relatively easy for exchange-traded funds to find during the equity mutual fund rout, as the media, including IU.com, have highlighted the transparency and low costs of ETFs vs. traditional mutual funds. IndexUniverse.com contributor Rich Romey, president of advisory firm ETF Portfolio Solutions, explains all the reasons why advisors should migrate to ETFs.

Read the full article here.

TheStreet.com Says Buy Bond ETFs

Bond exchange-traded funds may only represent about 6% of the ETF industry by assets, but they represent 90% of a new Top Ten ETF list put together by TheStreet.com, thanks to high yields and stock market woes. The article explains the rationale behind TheStreet.com's unusual ETF ratings system.

Many academic studies make the claim that stock spin-offs lead to better equity performance. It's an argument that led Claymore Securities to launch an ETF seeking to make good on the academic theory. But Claymore's spin-off ETF, launched two years ago, has lost 45% since inception, according to Canada's Globe and Mail. Is its underperformance proof of a flawed theory, or have short-term market conditions unfairly hurt the ETF?

Read the full article here.

No End In Sight For Commodity Woes

Commodity exchange-traded funds have been beaten up, and The Street.com speaks with a handful of advisors who think they'll get worse before they get better.  What's interesting about this article, however, is not necessarily the thoughts on commodities per se; rather, it's the fact that advisors are nervous about entering any market that's suffered in the recent downturn. They would rather wait for markets to rebound and miss the first 15% of the move than pile in too early and catch more downside.

You can read the article here.

"The Russian public accepted a non-participation pact in which the government delivers [prosperity] and the people do not meddle in politics," said Masha Lipman of the Carnegie Moscow Centre, a political think tank. "And until now the government was delivering in a very generous way: People's incomes were growing faster than the economy; people's salaries were growing faster than the productivity of labour did. But now that the Kremlin will no longer be able to rely on ample resources, the question is to what extent will people be disaffected and how might they act."

The financial crisis seems to have given the Kremlin the opportunity to reassert at least some control over the industries that were so haphazardly discarded during the Yeltsin era. The agent of influence is a government development agency called Vnesheconombank (VEB). The chairman of its supervisory board is - guess who - Mr. Putin. Some of Russia's most powerful government officials, including the finance and transportation ministers, prop up the rest of the board.

Silencing critics Russia's leaders are almost certainly up to their old tricks. Last week Karinna Moskalenko, a human rights lawyer who represents the family of Anna Politkovskaya, the crusading journalist and Kremlin foe gunned down in 2006, was admitted to a French hospital with mercury poisoning after the toxic metal was found in her car. Her illness just happened to prevent Ms. Moskalenko from attending the start of pretrial hearings into Ms. Politkovskaya's death in Moscow.

For months now, Iceland has been the problem child of the industrialized world. Now this island of 320,000 people in the North Atlantic has become the poster child of the new dark age of global finance. Faced with the very real danger of financial collapse after being frozen out of the credit markets, an increasingly desperate Icelandic government yesterday seized the country's second-largest bank, Landsbanki; pumped fresh capital into the biggest one, Kaupthing Bank; pegged its currency, the krona, to the euro in an effort to stem its nosedive; and revealed that it has lined up an emergency infusion of €4-billion ($6.03-billion) from a most unlikely source - Russia.

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