Commodities Rally on Demand Outlook as U.S. Stocks Advance, Bonds Retreat

Commodities rose for the first time this week amid signs of increasing demand, helping energy and raw-material producers lead U.S. stocks to their first gain in four days. Oil rallied following an unexpected drop in supplies, while 10-year Treasury yields climbed from their 2011 low.

The Standard & Poor’s GSCI index of commodities climbed 2.7 percent, led by wheat and lead, at 4 p.m. in New York. The S&P 500 Index rose 0.9 percent, extending gains after minutes from the Federal Reserve’s last meeting signaled policy makers were in no hurry to raise interest rates. The pound weakened versus all 16 major peers amid signs the Bank of England may refrain from interest-rate increases in the near term. Ten-year yields rose six basis points to 3.18 percent.

Raw materials will extend their rebound from the record plunge in 2008 as an advance in oil and gold helps to compensate for a retreat in base metal prices, said Ray Eyles, chief executive officer of JPMorgan Chase & Co.’s commodities business in Asia. U.S. crude supplies fell by 15,000 barrels last week, the Energy Department reported today, defying analysts’ average forecast of an increase of 1.7 million barrels.

“Commodity markets look bullish in the face of growing demand in most of the world,” said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy. “Demand will pick up during the second half of this year and next year. Buyers are waiting in the wings, and will be for some time, waiting for dips.”

Commodity Rebound

The GSCI commodities index rebounded after falling 1.6 percent over the previous two days. Oil rose 3.3 percent to $100.10 a barrel and gasoline climbed 1.2 percent to $2.9555 a gallon. Gasoline inventories rose 119,000 barrels to 205.9 million in the week ended May 13. Supplies were forecast to increase 950,000 barrels, according to the median of 16 analyst responses in the Bloomberg News survey.

Wheat rallied 6.9 percent, corn advanced 4.1 percent and cotton increased 3.1 percent as U.S. dry weather may curb supplies. Lead climbed 6.1 percent.

Exxon Mobil Corp. rallied 1.7 percent to pace gains in all 41 energy companies in the S&P 500, while CF Industries Holdings Inc. surged 4.4 percent to help lead raw-material shares higher.

The S&P 500 yesterday fell to a one-month low as a reduced sales forecast at Hewlett-Packard Co. and an unexpected decline in housing starts damped optimism about the economic recovery. The measure slid 2.5 percent through yesterday since climbing to an almost three-year high on April 29, as economic data began to trail estimates and investors awaited the end of the Federal Reserve’s $600 billion in Treasury purchases at the end of June.

Fed Minutes

Fed policy makers began to coalesce last month on a strategy to reverse record monetary stimulus by first ending their reinvestment policy and later raising interest rates and selling assets. Almost all officials agreed that the “first step toward normalization” should be ceasing reinvestment of principal payments on mortgage debt that began in August, the Federal Open Market Committee said in records of its April 26-27 session, released today in Washington.

A majority preferred to sell the Fed’s securities after raising short-term interest rates, and most wanted to put asset sales on a preannounced schedule while using federal-funds rate increases as an “active tool.”

‘Party Has to End’

“They know the party has to end at some point soon but there is no time yet on when,” said Peter Boockvar, equity strategist at Miller Tabak & Co. in New York, in a note to clients.

The Stoxx Europe 600 Index climbed 0.3 percent, ending a four-day slide. Rio Tinto Group advanced 1.5 percent, helping lead gains among mining companies. Land Securities Group Plc (LAND), the U.K.’s largest real-estate investment trust, surged 6.4 percent, the most in almost two years, as profit topped estimates. Rivals British Land Co. and Hammerson Plc jumped at least 3.2 percent.

The MSCI Emerging Markets Index added 0.9 percent, its best gain in a month, after yesterday closing at the lowest level since March 23. Russia’s Micex Index jumped 1.1 percent, buoyed by higher oil and metals prices. South Korea’s Kospi Index (KOSPI) jumped 1.6 percent as carmakers surged on speculation of higher sales.

Declines in the pound were led by the South African rand and New Zealand dollar, which gained more than 1 percent each versus the British currency. Minutes from the Bank of England meeting this month showed policy makers voted 6-3 to keep interest rates on hold this month as the majority warned that tightening policy now could damp consumer spending.

Kiwi, Krona

The New Zealand dollar strengthened 0.5 percent against the U.S. currency as reports showed producer prices and consumer confidence in the nation increased. Sweden’s krona appreciated versus most of its most-traded counterparts after the National Debt Office said that the country will have a larger budget surplus than previously forecast this year because of state- asset sales and as the economy continues to recover.

Credit-default swaps on U.S. Treasuries rose by the most in a month as the government struggles to agree on a long-range deficit-cutting plan as part of efforts to raise the $14.3 trillion national debt limit. Contracts rose from a six-week low, climbing 5.2 basis points to 46.2, according to CMA prices at 4 p.m. in New York. That compares with 51.5 basis points Jan. 27 and a record 100 basis points in 2009.

Chances of a bipartisan accord on cutting the deficit diminished after Republican Senator Tom Coburn of Oklahoma abandoned the talks yesterday. The parties are at an impasse, with Republicans balking at increasing tax revenue and many Democrats rejecting significant changes to entitlement programs.

European CDS

Swaps insuring European sovereign debt also rose, reversing an earlier decline, after European Union politicians stopped short of banning some of the derivatives. Swaps protecting Greek government bonds jumped 173.7 basis points to 1,448.7, according to CMA. Contracts on Ireland climbed 24.1 basis points to 635.3, Italy increased 1.1 basis points to 148.3 and Spain was 2.1 higher at 237.9.

The extra yield investors demand to hold 10-year Portuguese securities instead of benchmark German bunds, the region’s benchmark government securities, increased 15 basis points to 6.06 percentage points. Portugal sold 1 billion euros ($1.43 billion) of two-month bills at an average yield of 4.657 percent, the country’s debt management agency said. The auction attracted bids for 2.1 times the amount offered.

To contact the reporters on this story: Mark Shenk in New York at mshenk1@bloomberg.net; Stephen Kirkland in London at skirkland@bloomberg.net.

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net

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