Bullish Wagers Drop to Eight-Week Low Before Rally: Commodities

Hedge funds cut bullish commodity wagers to the lowest since the middle of August before signs the U.S. economy is improving and declining grain stockpiles drove prices to a three-week high.

Speculators reduced net-long positions across 18 U.S. futures and options by 0.4 percent to 1.24 million contracts in the week ended Oct. 9, the lowest since Aug. 14, U.S. Commodity Futures Trading Commission data show. Corn bets dropped to the lowest since July before the U.S. government cut its stockpile forecast on Oct. 11. Soybean-oil wagers tumbled 64 percent, and those on crude oil contracted for a third week.

U.S. consumer confidence unexpectedly jumped in October to the highest level since before the recession began, and jobless claims fell to a four-year low, reports showed last week. The economy is improving more than forecasters anticipated, according to the Citigroup Economic Surprise Index, which is at the highest since the end of February. Commodities jumped 11 percent since June 30 as central banks from the U.S. to Europe to Japan announced measures to bolster growth.

“Economic fears remain and try to beat the markets, but the trickle of fundamental reports continues to flow in and support commodities,” said James Paulsen, the Minneapolis-based chief investment strategist at Wells Capital Management, which oversees about $325 billion. “There is growing evidence that the U.S. economic recovery has been gearing up and is more broadly based and hence less vulnerable to external shocks.”

GSCI Gains

The Standard & Poor’s GSCI Spot Index of 24 raw materials gained 0.9 percent last week, touching 674.77 on Oct. 11, the highest since Sept. 19. The MSCI All-Country World Index of equities fell 2 percent, and the dollar gained 0.4 percent against a basket of six major trading partners. Treasuries returned 0.4 percent, a Bank of America Corp. index shows. The GSCI gauge fell 0.3 percent to settle at 663.08.

The Thomson Reuters/University of Michigan preliminary October consumer sentiment index increased to 83.1, the highest since September 2007, from 78.3 the prior month, data showed Oct. 12. Applications for jobless benefits dropped 30,000 to 339,000 in the week ended Oct. 6, the fewest since February 2008. Cars sold at a 14.9 million annual rate in September, the fastest pace since 2008, according to Ward’s Automotive Group.

China’s rail-infrastructure investment will probably exceed 520 billion yuan ($83 billion) next year, 21st Century Business Herald reported on Oct. 12, citing the railway ministry. The country raised planned investment this year to 516 billion yuan on Oct. 10, from 496 billion yuan previously.

IMF Forecast

Europe’s debt crisis will still be a drag on global growth and may limit gains for commodities, said John Stephenson, who helps manage $2.7 billion at First Asset Investment Management Inc. in Toronto. Europe accounts for about 18 percent of global copper demand and 22 percent of oil consumption, data from Barclays Plc and BP Plc (BP/) show.

The International Monetary Fund cut its growth forecasts on Oct. 8 and warned of even slower gains unless officials in the U.S. and Europe address threats to their economies. The world economy will expand 3.3 percent this year, the slowest since the 2009 recession, the Washington-based lender said. Advances in developed economies are “tepid,” IMF Managing Director Christine Lagarde said in an interview with the British Broadcasting Corp. in Tokyo on Oct. 12.

Alcoa Outlook

Industrial production in Germany, Europe’s largest economy, declined in August as companies scaled back investment, the Economy Ministry said Oct. 8. The start of the U.S. earnings season has overshadowed better-than-estimated economic data, with more than $750 billion erased from the value of global equity markets last week. Alcoa Inc. (AA), the largest U.S. aluminum producer, cut its global consumption forecast by 1 percentage point on Oct. 9 because of slowing Chinese demand.

“While China is trying to improve conditions, its biggest trading partner has not been able to do much about its condition, and that makes me bearish going forward,” said John Stephenson, who helps manage $2.7 billion at First Asset Investment Management Inc. in Toronto. “Europe has gone from one problem to another.”

Inflows into commodity funds in the week ended Oct. 10 totaled $1.26 billion, with gold and precious metals accounting for $1.2 billion, according to Cameron Brandt, the director of research for Cambridge, Massachusetts-based EPFR Global, which tracks money flows.

Citigroup Index

The Citigroup Economic Surprise Index jumped to 49.4 on Oct. 12 from this year’s low of minus 65.3 on July 19. A positive reading suggests the economic releases have on balance been better than the Bloomberg consensus. President Barack Obama and Republican presidential candidate Mitt Romney are trying to convince voters before the Nov. 6 election that they are best equipped to spur growth and accelerate hiring.

Bets on higher crude-oil prices fell 3.1 percent to 161,004 contracts, CFTC data show. Futures in New York capped the first weekly gain in a month as OPEC production fell to the lowest level in eight months. Production in the Organization of Petroleum Exporting Countries dropped 510,000 barrels a day to 31.17 million last month as supply from Nigeria, Iran and Saudi Arabia declined, the International Energy Agency said Oct. 12.

Gold wagers rose for an eighth week to 198,194 futures and options, the highest since Aug. 23, 2011. Holdings in exchange- traded products backed by the metal reached a record 2,582.98 metric tons on Oct. 11.

Farm Goods

A measure of 11 U.S. farm goods showed speculators lowered bullish bets in agricultural commodities by 1.6 percent to 663,172 contracts. That’s the fifth consecutive decrease, the longest retreat since April.

Corn holdings dropped 4.5 percent to 260,466 contracts, the lowest since July 17. Futures rose 0.6 percent in Chicago last week, reaching $7.76 a bushel on Oct. 11, the highest since Sept. 17.

The U.S. Department of Agriculture cut its outlook for global inventories of the grain by 5.4 percent on Oct. 11 and said reserves as a percent of consumption will fall to 13.7 percent, the lowest since 1974. The worst U.S. drought in more than 50 years has cut output by the most since 1996.

Prices for corn, wheat and soybeans will rise on tighter supplies as stockpiles are “critically low,” analysts at Goldman Sachs Group Inc. said in a report Oct. 12.

“The economic data out of the U.S. seems to be getting better, and China may be close to bottoming,” said John Toohey, a vice president of equities investments with USAA Investments who helps manage about $50 billion in San Antonio. “This is a good time to be ready to invest into commodities.”

To contact the reporter on this story: Debarati Roy in New York at droy5@bloomberg.net

To contact the editor responsible for this story: Steve Stroth at sstroth@bloomberg.net

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