Speculators increased bullish commodity bets by the most in two years as prices rebounded from a bear market, boosted by a crop-damaging drought in the U.S. and moves by China and Europe to spur economic growth.
Money managers raised their net-long positions across 18 U.S. futures and options by 33 percent to 963,447 contracts in the week ended July 3, Commodity Futures Trading Commission data show. While the Standard & Poor’s GSCI Index of 24 raw materials fell 0.3 percent since then, the measure has rallied 10 percent since reaching a bear market on June 21. Gains were led by corn, which climbed 33 percent, and wheat, which surged 22 percent.
The worst Midwest drought since the 1980s is wilting the U.S. corn crop, the world’s biggest, prompting Goldman Sachs Group Inc. to cut its forecast for yields. European Central Bank President Mario Draghi yesterday signaled policy makers may be open to another interest-rate cut after lowering the benchmark rate to a record last week. Chinese officials will intensify their response to an economic slowdown, Premier Wen Jiabao said, the official Xinhua News Agency reported July 8.
“We’re still locked in a risk-on, risk-off battle,” said Dan Denbow, a fund manager at the $1.8 billion USAA Precious Metals and Minerals Fund in San Antonio. “It’s back and forth until there’s clarity on where the economy goes.”
The S&P GSCI index climbed 1.1 percent this month as the MSCI All-Country World Index of equities dropped 1.2 percent and the U.S. Dollar Index, a measure against six trading partners, advanced 2.2 percent. Treasuries returned 0.8 percent, a Bank of America Corp. gauge shows.
China’s inflation eased to a 29-month low in June, giving policy makers room to take additional steps to spur growth. The Asian country’s government lowered benchmark interest rates on July 5 for the second time in a month. Wen said the nation will “implement a proactive fiscal policy,” Xinhua reported.
Federal Reserve Bank of Chicago President Charles Evans yesterday said the U.S. central bank should move more forcefully to lower the unemployment rate. Speaking at the same conference in Bangkok, Boston Fed President Eric Rosengren said another round of asset purchases is possible to spur growth.
The U.S. central bank bought $2.3 trillion of securities in two rounds of so-called quantitative easing and held borrowing costs at a record low from December 2008 through June 2011, spurring a 92 percent jump in the GSCI commodity index.
Investors may be getting “too excited” about the attempts by central bankers to shore up economies, said Chad Morganlander, a Florham Park, New Jersey-based fund manager at Stifel Nicolaus & Co., which oversees about $115 billion of assets. “A re-acceleration of global economic growth in the coming months is a delusion.”
More than $3.6 trillion has been wiped from the value of world equity markets since March 31 as Europe’s debt crisis worsened and U.S. unemployment stayed above 8 percent. U.S. employers added fewer jobs than forecast last month and the growth in private payrolls was the weakest in 10 months, the Labor Department said July 6. French business confidence dropped to the lowest in almost three years in June, the Bank of France said yesterday.
Money managers pulled $179 million from commodity funds in the week ended July 4, said Cameron Brandt, the director of research for Cambridge, Massachusetts-based EPFR Global, which tracks money flows. Gold and precious-metals funds outflows totaled $16 million, he said.
Prospects for raw-materials markets are “problematic” because “we remain unconvinced that a meaningful solution for the problems in the euro zone will be forthcoming,” analysts at Deutsche Bank AG said in a report on July 4.
A measure of 11 U.S. farm goods showed speculators raised bullish wagers in agricultural commodities by 28 percent to 679,849 contracts, the biggest gain since January. Hedge funds boosted bets on higher corn prices by 60 percent to 173,183 contracts, the most since April 10.
As of July 3, about 25 percent of the Midwest was in “severe” drought, according to the U.S. Drought Monitor. The condition of the U.S. corn crop, the world’s biggest, declined for a fifth consecutive week, the government said yesterday, citing data through July 8.
The lack of rain and extreme heat have created a “wicked combination,” said Kelly Wiesbrock, who helps manage $1.3 billion for San Francisco-based hedge fund Harvest Capital Strategies. Supplies “are going to be much tighter than people thought,” he said. “If we don’t get some rain in the next couple weeks, we could be see a lot higher prices.”
Investors decreased bets that copper prices would fall. As of July 3, net-short positions totaled 1,749 contracts, compared with 13,770 a week earlier. The metal is up 4.9 percent since reaching this year’s low on June 4.
Goldman Sachs said copper usage probably will keep climbing in China, the world’s top metals consumer.
A 50 percent jump in June property sales in eastern provinces of China compared with a year earlier will support metals demand, Goldman said in a report yesterday. The Copper Development Association says construction accounts for about 40 percent of demand.
“In a multitude of commodities, you have long term, supply-demand constraints,” said Michael Cuggino, who manages about $17 billion at San Francisco-based Pacific Heights Asset Management. “A lot of this negative sentiment is already priced in, which from our standpoint would argue for a long-term buying opportunity.”