Hedge funds reduced bets on higher commodity prices for the first time in seven weeks after China cut its growth target, just as prices rallied on signs the U.S. economy is improving and Greece is containing its debt crisis.
Money managers reduced combined bullish positions across 18 U.S. futures and options by 1.1 percent to 1.17 million contracts in the week ended March 6, Commodity Futures Trading Commission data show. Investors cut bets on copper by the most in two months and those on oil by the most since December. China uses more copper and energy than any other nation.
Commodities fell 1.5 percent in the week ended March 6, a day after China cut its economic-growth target to 7.5 percent, from 8 percent, the lowest since 2004. Prices rebounded 2.1 percent in the following three days, extending this year’s advance to 9.7 percent, as Greece and bond investors agreed to the biggest sovereign restructuring in history and the U.S. added more jobs than economists were expecting.
“The economy is looking better, and there’s a general risk-on kind of sentiment,” said Mihir Worah, who manages Pacific Investment Management Co.’s $22 billion Commodity Real Return Strategy Fund from Newport Beach, California. “How do I think investor sentiment is? Certainly, they’re voting with their money, and we’re seeing steady inflows into our funds.”
The Standard & Poor’s GSCI Spot Index of 24 commodities rose 0.4 percent last week, rebounding from a 1.6 percent decline, led by cocoa, gasoil, heating oil and crude. West Texas Intermediate fell 1.7 percent in the period covered by the CFTC report before advancing 2.6 percent in the following three days. Open interest, or contracts outstanding, across the members of the S&P GSCI expanded 0.6 percent, compared with a 0.1 percent contraction a week earlier, data compiled by Bloomberg show. Today, the S&P GSCI gauge fell 0.4 percent to settle at 704.27 in New York.
The MSCI All-Country World Index of equities fell 2.7 percent in the first two days of last week before rebounding 2 percent in the next three days, for a weekly drop of 0.7 percent. The dollar rose 0.8 percent against a basket of six major trading partners in the week, and Treasuries lost 0.3 percent, a Bank of America Corp. index shows.
China will expand 8.5 percent this year, from 9.2 percent in 2011, according to the median of 21 economist estimates compiled by Bloomberg. That’s almost four times the projected pace of the U.S. and compares with an estimated 0.4 percent contraction in the economy of the 17-nation euro region.
About 40 percent of the world’s copper, 43 percent of its aluminum and 46 percent of its nickel is consumed by China, according to Barclays Capital. The London Metal Exchange Index of six industrial metals fell 3.9 percent in two days as Premier Wen Jiabao cut the nation’s annual growth target in a state-of-the-nation speech on March 5. The gauge rebounded 2.3 percent in the final two days of the week.
The U.S. added 227,000 jobs in February, completing the bets six months for payroll growth since 2006, the Labor Department reported March 9. The Bloomberg Consumer Comfort Index of household confidence in the U.S. rose to a four-year high in the week ended March 4.
That boosted investor confidence after reports showed Europe is slowing. Manufacturing output in the region shrank in February by more than analysts expected, Markit Economics said March 5. Gross domestic product in the euro area contracted 0.3 percent in the fourth quarter from the third and the region’s economy may shrink 0.1 percent in 2012, European Central Bank President Mario Draghi told reporters in Frankfurt on March 8.
Europe accounts for 18 percent global copper demand and 22 percent of oil consumption, data from Barclays and BP Plc show. Copper dropped 1.1 percent to $3.8585 a pound in New York last week, parings its annual gain to 12 percent. Crude rose 0.7 percent to $107.40 a barrel in New York, boosted by concern that supplies will be curbed from Iran, the second-biggest producer in the Organization of Petroleum Exporting Countries.
The S&P GSCI rebounded after Greece reached a 95.7 percent participation rate among investors for a debt exchange, after the state got approval to activate collective action clauses. While the net present value loss for investors was more than 70 percent on March 9, it eased concern about the regional financial crisis that has roiled global markets.
“It removes one big stumbling block, which is the odds now heavily favor Greece not having a messy default,” said Cameron Brandt, the director of research at Cambridge, Massachusetts-based EPFR Global, which tracks investment flows. “The Greek deal basically put most of the burden on private bond holders.”
Investors put $214 million into commodities in the week ending March 7, according to EPFR. Gold and precious metals funds attracted $404 million, compensating for a $190 million drop in industrial metals and agriculture, the research firm estimates. The S&P GSCI Agriculture & Livestock Total Return Index fell 1.5 percent in the week covered by the CFTC data on prospects for rising global supplies of corn and wheat.
Investors in gold-backed exchange-traded products added to holdings for a seventh consecutive week, taking the total to a record 2,408.4 metric tons valued at $132.7 billion, data compiled by Bloomberg show. The metal rose 0.1 percent to $1,711.50 an ounce in New York last week, for an annual gain of 9.2 percent. Gold is advancing for a 12th consecutive year.
The advance in commodity prices in the second half of last week may be a sign that speculators resumed adding to bullish bets. The combined net-long position across 18 commodities has more than doubled since reaching a 33-month low in December, CFTC data show. Open interest jumped 13 percent in the first two months of the year, the biggest two-month gain since 2006, data compiled by Bloomberg show.
Investments in commodity ETPs rose by $5.9 billion in January and February, New York-based BlackRock Inc., the world’s largest asset manager, wrote in a report March 9. Commodities attracted more than $20 billion in new money in the first two months, compared with a decline of $10.1 billion in December, Citigroup Inc. said in a report the same day.
Growth in emerging markets is “strong enough to maintain a decent growth rate for most industrial commodities,” said Bill Greiner, who helps manage $22 billion as the president and chief investment officer at Kansas City, Missouri-based Scout Investments, a unit of UMB Financial. “The U.S. economy, I think we’re accelerating. GDP growth rates are accelerating. I think that’s going to be sustainable.”