Slumping energy and metal prices sent commodities to their biggest monthly loss since May, lagging behind stocks, bonds and the dollar, as the global economy grew at the slowest pace since the 2009 recession.
The Standard & Poor’s GSCI Total Return Index (MXAP) of 24 raw materials fell 4.1 percent, erasing gains for the year. The MSCI All-Country World Index of stocks slid 0.6 percent, including dividends, while the U.S. Dollar Index slid 0.02 percent. Bonds of all types gave positive returns, according to Bank of America Merrill Lynch’s Global Broad Market Index.
Investor optimism dimmed as the International Monetary Fund cut its global growth forecast and the Federal Reserve said strains on the world economy present “significant downside risks.” China reported the seventh straight quarter of slowing growth, while services and manufacturing in the 17-nation euro area last month contracted more than economists forecast.
“Europe is a complete and total disaster and doesn’t appear to be solved,” John Stephenson, who helps manage $2.7 billion at First Asset Investment Management Inc. in Toronto, said in a telephone interview. “China clearly seems to be slowing. You essentially have a situation where investors just have very little optimism.”
The S&P GSCI Total Return Index fell for a second month, leaving the gauge down 0.7 percent for 2012. Commodities are headed for a second consecutive annual loss for the first time since 1998. The total return gauge was up 0.2 percent today.
China’s economy, the biggest user of everything from copper to cotton, has slowed for seven straight quarters, the government said Oct. 18. Greece’s coalition leaders continued to squabble over measures needed to clinch rescue funds, while in Spain, where unemployment climbed to a record, Prime Minister Mariano Rajoy weighed whether to apply for a full sovereign bailout.
“The markets realized that slow growth is still a concern around the world,” Michael Cuggino, who manages about $17 billion at San Francisco-based Pacific Heights Asset Management, said in a telephone interview.
Raw materials may get a boost from the U.S. The Commerce Department said on Oct. 26 the economy grew at a 2 percent annual rate in the third quarter, topping the median forecast by analysts for a 1.8 percent gain. Consumer confidence rose to a five-year high in October, and home sales in September were the most in two years, figures showed last week.
The GSCI Total Return Index jumped 12 percent in the third quarter as the Fed announced a third round of so-called quantitative easing, which involves $40 billion in monthly purchases of mortgage-backed bonds. Commodities, as measured by the S&P GSCI Spot Index, surged 92 percent from December 2008 through June 2011 as policy makers bought $2.3 trillion of debt in two rounds of stimulus.
Speculators anticipate this year’s bid to spur growth won’t be enough. Bets on rising raw-materials prices shrank for the third straight week in October, the longest losing streak since April, data from the U.S. Commodity Futures Trading Commission in Washington show. Twenty of the 24 commodities tracked by the GSCI dropped in October. Gold slid 3.1 percent, the first decline in five months. Nickel on the London Mercantile Exchange slumped 12 percent, the first loss in three months, while zinc fell 11 percent, the most this year.
Australia’s central bank resumed cutting its benchmark interest rate on Oct. 2, two weeks after Resources Minister Martin Ferguson said Sept. 17 that the global commodity boom is over. In the past two months, weaker prices and an elevated Australian currency prompted mining companies BHP Billiton Ltd. (BHP) and Fortescue Metals Group Ltd. (FMG) to put off projects and cut jobs.
“If you’re an investor in industrial materials or commodities, you realize the party is effectively over,” Peter Sorrentino, who helps manage about $14.6 billion of assets at Huntington Asset Advisors in Cincinnati, said in a telephone interview. “The growth in demand is not going to be there.”
Gasoline led commodities lower, plunging 17 percent to $2.7618 a gallon on the New York Mercantile Exchange, the sharpest slide since November 2008. The decline erased much of the 23 percent gain of the third quarter as U.S. refineries restarted units after repairs and demand sank to a seven-month low, according to Energy Department data.
While pump prices are up 2.3 percent from a year ago, they fell every day in the past three weeks to $3.521 a gallon, the lowest since July 31, according to data from the AAA, the largest U.S. motoring organization. The decline blunts one weapon of Republican presidential candidate Mitt Romney, who has blamed President Barack Obama for almost doubling fuel prices since 2009. The election is Nov. 6.
“I’m expecting prices to continue to fall as we go through the winter,” said Andy Lipow, president of Lipow Oil Associates LLC in Houston. “Supplies are improving and we’re going into the weaker demand season.”
Crude oil fell 6.5 percent in October to $86.24 a barrel on the Nymex, the biggest drop since May, as rising U.S. production drove inventories to the highest level at this time of year in at least 30 years. Output grew to 6.61 million barrels a day in the week ended Oct. 19, the highest since May 1995. A combination of horizontal drilling and hydraulic fracturing, or fracking, has unlocked supplies trapped in shale formations in North Dakota, Texas and Oklahoma.
“The market is coming to grips with the possibility that we may have too much supply,” Tom Pawlicki, director of market research at Chicago-based EOXLive, said in a telephone interview.
The MSCI All-Country World Index of equities retreated, snapping a four-month rally. Trading in the U.S. was halted Oct. 29 and Oct. 30, the longest weather-related shutdown since 1888, after Hurricane Sandy disrupted power supplies and caused flooding in the Northeast.
Ericsson AB (ERICB) slumped 2.6 percent last month after the world’s largest maker of mobile-phone networks said third- quarter profit declined 43 percent. DuPont Co. (DD), the most valuable U.S. chemical maker by market value, tumbled 11 percent after saying it would eliminate about 1,500 jobs and posted a smaller profit than analysts estimated.
“This has been a risk-off month,” Matt McCormick, who helps oversee $7.3 billion as a money manager at Cincinnati- based Bahl & Gaynor Inc., said in a telephone interview. “The election has heated up, revenues have come out weaker than expected, Europe is making some more noise. Many people expect volatility to increase, not decrease.”
For the 325 companies in the Standard & Poor’s 500 Index that have reported quarterly results, earnings have risen 0.4 percent, according to data compiled by Bloomberg. Sales missed analysts’ estimates at 60 percent of the gauge’s companies, the data show.
The Stoxx Europe 600 Index rose 0.8 percent last month, while the S&P 500 lost 1.9 percent. The U.S. equity benchmark will advance 0.3 percent to 1,417 by the end of the year, according to the average of 14 Wall Street strategists tracked by Bloomberg. The MSCI Asia Pacific Index fell 0.4 percent.
Bonds of all types returned 0.3 percent in October on average, according to Bank of America Merrill Lynch’s Global Broad Market Index.
Fixed-income markets balanced the prospect of an election victory by Romney, who has said he disagrees with the Fed’s easing programs and would replace the central bank’s chairman, with the potential for $607 billion in automatic federal spending cuts and tax increases at year end to weaken U.S. economic growth, said Anthony Valeri, a market strategist in San Diego at LPL Financial, which oversees $350 billion of assets.
Rising long-term bond yields in October “are subtle, but they simply reflect an improving, even if not decisive, chance of Romney leadership,” Valeri said. “Ultimately, I think the fiscal cliff will be a bigger driver. Election impact could be short-lived.”
Yields on 30-year Treasuries rose four basis points, the third straight month of increases. The Fed has sought to drive down unemployment by keeping its target rate for overnight loans between banks between zero and 0.25 percent since December 2008. The central bank announced Sept. 13 that it would probably keep rates at a record low into 2015.
Bank of America Merrill Lynch’s Global Broad Market Index rallied for a fourth month, the longest streak since 2010. The gauge, tracking some 19,800 fixed-income securities with a market value of about $45 trillion, climbed 5.1 percent this year as of Oct. 31, compared with 5.9 percent in 2011. Average yields rose 3 basis points to 1.64 percent in October and have declined from 2.24 percent at the end of 2011.
Investment-grade corporate debt rose 1.1 percent as of Oct. 31, the most since July and the seventh consecutive monthly gain in the longest advance since 2009, Bank of America Merrill Lynch index data show. An index of high-yield bonds returned 1.32 percent, the fifth-straight monthly rally. Speculative-grade debt is rated below Baa3 by Moody’s Investors Service and less than BBB- at S&P.
Treasuries fell 0.17 percent as of Oct. 31. Yields on 10- year U.S. government debt are forecast to climb to 1.74 percent by the end of the year, according to a Bloomberg survey of economists, with the most recent projections given the heaviest weightings.
Greek bonds were the best performers in October among the 26 sovereign markets tracked by Bloomberg and the European Federation of Financial Analysts Societies, rising 21 percent on a dollar basis. Portugal was second, with a 4.2 percent gain. South Africa’s government debt lost the most, declining 4.7 percent.
The U.S. Dollar Index, which tracks the greenback against the currencies of six major U.S. trading partners, was little changed last month after dropping 2.1 percent in the third quarter. The index has fallen 0.4 percent in 2012.
The gauge will be about unchanged at 80 in the first quarter of next year from 79.89, according to the median of 11 analyst estimates compiled by Bloomberg.
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