Funds Win With Bull Bets Before Biggest Rally Since ’09

Hedge Funds Win on Bull Bets Before Biggest Rally
Sugar wagers climbed to the highest since mid-April. Photographer: Dario Pignatelli/Bloomberg

Hedge funds lifted their bullish commodity bets for a third week, just before a European agreement to contain the region’s debt crisis spurred the biggest rally in raw-material prices in three years.

Money managers increased their combined net-long positions across 18 U.S. futures and options by 15 percent to 724,783 contracts in the week ended June 26, Commodity Futures Trading Commission data show. That’s the biggest gain since January. Corn holdings rose to the most in five weeks, and sugar wagers climbed to the highest since mid-April.

Most markets surged June 29 after European leaders agreed to a 120 billion-euro ($151 billion) plan to stimulate growth and ease terms for loans to Spanish banks. The Standard & Poor’s GSCI Spot Index of 24 commodities jumped 5.6 percent, the biggest gain since April 2009, the euro climbed the most this year and Spanish bonds rallied. Europe consumes 18 percent of the world’s copper and accounts for 22 percent of oil demand, data from Barclays Plc and BP Plc show.

Policy makers “are addressing a lot of issues that were taboo,” said Mihir Worah, who manages Pacific Investment Management Co.’s $22 billion Commodity Real Return Strategy Fund from Newport Beach, California. “Whether this plan works or not, the fact that they’re talking about them is important. Stable or growing economies support more commodity demand.”

Equities Rally

The S&P GSCI index fell 0.3 percent to settle at 597.4 today after rising 6.3 percent last week. The MSCI All-Country World Index of equities gained 2.5 percent last week as the U.S. Dollar Index, a measure against six trading partners, retreated 0.8 percent. Treasuries returned 0.1 percent, a Bank of America Corp. index shows.

Leaders from the 17-nation euro zone ended talks last week by dropping the requirement that governments get preferred-creditor status on crisis loans to Spain’s banks and opened the door to recapitalizing lenders directly with bailout funds once Europe sets up a single banking supervisor. Until now, they had to get aid through their governments. Germany’s parliament approved the creation of a permanent bailout fund June 29.

Orders for U.S. durable goods climbed more than forecast in May, easing concern that U.S. manufacturing is faltering. Bookings rose 1.1 percent, the first gain in three months, the Commerce Department said June 27. Business activity expanded in June at a faster pace than expected, a gauge from the Institute for Supply Management-Chicago Inc. showed June 29.

Economic Confidence

The rally in commodities may not last because “the cloud of Europe is still going to hang over the market for several quarters,” said Jack Ablin, the chief investment officer of BMO Harris Private Bank in Chicago, which oversees about $60 billion of assets. Economic confidence in the euro area slumped to the lowest in more than 2 1/2 years in June and German unemployment increased more than economists forecast, separate reports showed June 28. Spain and Cyprus became the fourth and fifth euro members to seek external aid last month.

The S&P GSCI slumped 13 percent last quarter, the most since the global recession, and tumbled into a bear market on June 21 amid the escalating fiscal crisis and after the Federal Reserve refrained from starting another round of debt buying. More than $3.6 trillion has been erased from the value of global equities since March 31, data compiled by Bloomberg show.

Money managers pulled $193 million from commodity funds in the week ended June 27, according to data from Cambridge, Massachusetts-based EPFR Global, which tracks money flows. Investor outflows were $8.2 billion in May, the highest monthly total since a record $9.8 billion in September, Barclays said on June 25, citing its measure of exchange-traded products, index-linked funds and medium-term notes.

Morgan Stanley

Morgan Stanley stuck with recommendations that investors buy gold, copper and iron ore. As Europe’s crisis threatens growth, investors should seek “exposure only to those metals and bulk commodities that reflect the benefits of tight supply conditions and pockets of residual demand strength,” analysts Peter Richardson and Joel Crane said in a report June 28.

Rio Tinto Group, the world’s third-largest mining company, said June 29 that economic growth in China will accelerate in the second half of this year even as European turmoil escalates. The Asian country is the world’s biggest consumer of everything from aluminum to cotton to pork.

Funds boosted their bullish oil wagers for the first time in eight weeks, increasing the net-long position by 1 percent to 124,017 contracts, CFTC data show. New York futures surged 9.4 percent on June 29, the biggest gain in more than three years.

Farm Bets

A measure of 11 U.S. farm goods showed speculators raised bullish wagers in agricultural commodities by 24 percent to 533,095 contracts, the biggest gain since February. Traders switched to betting on a wheat rally with a net-long position of 40,194 contracts, compared with a net-short holding of 5,182 the prior week, the government said.

Money managers boosted wagers on higher corn prices by 53 percent to 108,542 contracts, the highest since May 22. The grain surged 15 percent last week, the biggest gain since December 2008, after a government report showed inventories tumbled the most in 16 years and as dry weather parched fields.

Crops wilted as little or no rain fell in growing areas in the past month, according to the National Weather Service. A dry spell this severe happens only once every quarter-century, said Sal Gilbertie, who helps manage $79 million of assets as the president and chief investment officer of Teucrium Trading LLC in Santa Fe, New Mexico. The U.S. is the world’s biggest corn producer and exporter.

“Commodities are priced at a very good value right now,” said Bill Greiner, who oversees $13 billion of assets as chief investment officer at Mariner Wealth Advisors in Kansas City, Missouri. “That’s traditionally the time you want to step up and buy.”

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