First All-Market Gain in Two Years Led by Drought, Draghi
For the first time in more than two years, commodities, equities, bonds and the dollar posted a monthly gain, as the U.S. drought sent corn prices to a record and European Central Bank President Mario Draghi’s pledge to protect the euro buoyed stocks.
Raw materials led the increase as the Standard & Poor’s GSCI Total Return Index of 24 raw materials rose 6.4 percent in July, the most since October. The MSCI All-Country World Index of equities rallied at the end of the month for a 1.4 percent gain. The U.S. Dollar Index, a measure against six currencies, added 1.3 percent. Bonds of all types returned 1.4 percent on average, the most since December, Bank of America Merrill Lynch’s Global Broad Market Index shows.
The last time all four measures rose for a month was in April 2010, when concerns about Greece were heating up and U.S. economic reports were improving. While corn rose the most last month in almost a quarter century and wheat reached a four-year high, financial assets gained as policy makers worked to boost global growth. Federal Reserve Chairman Ben S. Bernanke said he’s prepared to take more steps, and Draghi pledged to do “whatever it takes” to preserve the euro.
“A lot of the rally in everything is central-bank led,” said Jason Brady, a managing director at Thornburg Investment Management in Santa Fe, New Mexico, which oversees $80 billion. “So now we have a world where central-bank actions are really what people are looking at, and those actions are really positive for all asset prices and negative for savers and folks who are looking to put money in at reasonable levels over a longer period of time.”
Gains in all four measures have been unusual as Europe’s debt crisis and slowing growth in China spurred demand for the perceived safety of the dollar and U.S. bonds while damping optimism for stocks and hurting oil prices.
Government of Singapore Investment Corp., managing more than $100 billion, almost quadrupled its cash holdings to 11 percent of its portfolio in the year ended March from 3 percent a year earlier, the sovereign wealth fund said in its annual report this week. GIC pared its holdings of stocks and bonds.
In April 2010, U.S. stocks rallied as profits of Standard & Poor’s 500 Index companies grew 52 percent in the first quarter and 48.5 percent in the second. Treasuries and the dollar strengthened amid worries that Greece would default. Commodities got a boost as economic reports showed improvement and from investors buying gold, crude and corn as alternative assets.
Even after last month’s crop-led gain, the S&P GSCI is 1.4 percent lower for the year, extending a 1.2 percent drop in 2011. Arabica coffee fell 26 percent and cotton declined 20 percent, while oil slid 11 percent. Commodity assets under management slumped a record $5.3 billion to $404 billion in the second quarter, Barclays Plc estimates. The MSCI All-Country World Index (MXWD) rose 5.5 percent since Dec. 31, the Dollar Index rose 3 percent and the Global Broad Market Index of bonds returned 4.2 percent. The S&P GSCI rose 0.3 percent today to 637.61 as of 4 p.m. in New York.
Grain and oilseed rallies accelerated in July as heat waves in southern Europe damaged crops, Indian farmers delayed sowing because of a late monsoon, and Australian growers endured below- average rainfall. That was partly offset by a drop in hog and feeder-cattle prices prompted by concern that owners will send more animals to slaughter as feed costs surge.
Corn jumped 27 percent last month on the Chicago Board of Trade, touching an all-time high of $8.205 a bushel yesterday, and soybeans rose 15 percent, reaching a record $16.915 a bushel on July 23. Wheat advanced 17 percent to $8.8825 a bushel. Corn will trade at $9 in three months, wheat at $9.80 and soybeans $20, Goldman Sachs Group Inc. said on July 23.
“The agricultural commodities’ price spike is a one-off supply shock” and “investors are concerned about Europe and slowing growth in emerging markets,” said Ashish Misra, the London-based head of investment strategy at Lloyds TSB Banking Group Plc’s private banking unit, which oversees about 11 billion pounds ($17 billion) of assets. “Investors are still expecting some kind of policy intervention.”
Natural-gas futures rose 14 percent last month on the New York Mercantile Exchange, exceeding $3 per million British thermal units for the first time since January. A 62 percent tumble over 10 months through mid-April because of a supply glut made the fuel cheaper than coal for power plants. Air- conditioning use in the U.S. was projected to be about 12 percent above normal in the week ending today, according to Weather Derivatives, a consultant in Belton, Missouri.
Natural gas will average $3.25 next year, from a projected $2.64 this year, Barclays said July 26. The U.S. had its warmest first half to a year on record, Roger Pulwarty, the program director for the National Oceanic and Atmospheric Administration’s drought system, told a Congressional panel.
Hedge funds and other large speculators are now holding their biggest bet on rising commodity prices since March, according to data from the Commodity Futures Trading Commission. Open interest, or outstanding futures contracts, across the 24 members of the S&P GSCI rose 0.4 percent in July, expanding for the first time since April.
The MSCI All-Country World Index was 2.9 percent lower for the month on growing concerns about the slowing global economy until Draghi’s comments. The measure wound up rising 1.4 percent including dividends, rallying for a second month. The gauge advanced 5 percent in June after an 8.9 percent slump in May. Stocks rose on bets Europe may move toward a new round of bond buying to ease borrowing costs.
Draghi’s euro pledge “brought some optimism that Europe is getting its act together,” Richard Sichel, who oversees $1.6 billion as chief investment officer at Philadelphia Trust Co., said in a phone interview. “Anything that would lower borrowing costs would be a positive from an economic standpoint. You want to see growth and you want to see an increase in corporate earnings. Those policy responses are being viewed as a way to get you there.”
The advance in the MSCI equity gauge was led by Nexen Inc., the Calgary-based energy company that climbed 48 percent in July on a buyout offer from Cnooc Ltd. (CEO), China’s largest offshore oil and gas explorer. Richardson, Texas-based MetroPCS Communications Inc., a pay-as-you-go wireless carrier, rallied 45 percent for the month after reporting quarterly profit that beat analyst estimates. Western Digital Corp., the maker of disk drives in Irvine, California, increased 30 percent after earnings exceeded forecasts by 37 percent.
The Stoxx Europe 600 Index climbed 4.1 percent. The Standard & Poor’s 500 Index added 1.4 percent. The S&P 500 will rise 0.7 percent to 1,389 by the end of the year, according to the average of 13 Wall Street strategists tracked by Bloomberg. The MSCI Asia Pacific Index (MXAP) gained 1.5 percent.
Concern that slower economic growth and Europe’s crisis would hurt profits sent global stocks to the lowest level in about a month on July 25. Sales beat analysts’ estimates at 48 percent of the gauge’s companies that have reported earnings for the latest quarter, data compiled by Bloomberg show. That compares with 62 percent in the previous quarter.
Alcatel-Lucent SA (ALU) plunged 31 percent as France’s largest telecommunications-equipment supplier said it will miss a profit forecast and posted a quarterly operating loss because of weaker demand. Advanced Micro Devices Inc., based in Sunnyvale, California, tumbled 29 percent after forecasting lower sales amid a loss of market share and diminished demand for personal computers. Facebook Inc. (FB), the largest social network, dropped 30 percent after its first earnings report as a public company showed a slower sales gain and narrower profit margins.
The 1.4 percent return on fixed-income securities worldwide, including interest reinvested, was the most for a month since December and compares with a 0.2 percent loss in June, the Bank of America Merrill Lynch indexes show. Sovereign debt globally appreciated 1 percent, the most since May.
Treasuries gained 1 percent, reversing the previous month’s 0.4 percent loss. The yield on the benchmark 10-year security reached a record low of 1.38 percent on July 25. It will average 1.68 percent in the third quarter, according to the median of 75 analyst estimates compiled by Bloomberg.
South Africa’s bonds were the best performers among the 26 sovereign markets tracked by Bloomberg and the European Federation of Financial Analysts Societies, rising 4.2 percent. The rand depreciated 1.2 percent after the central bank unexpectedly cut borrowing costs on July 19, the first reduction since November 2010.
Securities for France and Belgium returned about 3.4 percent, while Portugal’s bonds were the worst performers, losing 1.2 percent. The yield on France’s 10-year bonds will average 3 percent this quarter, from 2.18 percent now, the median of six analyst estimates compiled by Bloomberg show. Corporate bonds globally returned 2.2 percent in July, the best return in six months.
Interest rates declined amid renewed concern about Spain’s national budget deficit and those of the regional governments, as well as worries that Greek bondholders may take more losses, said Anthony Valeri, a market strategist at LPL Financial Corp. There is a 90 percent chance of Greece leaving the euro in the next 12 to 18 months, Citigroup Inc. said.
“The risk of Greek default is back on the table and you have to worry about a Greek exit from the euro,” said Valeri of LPL Financial, which oversees about $350 billion of assets.
The 1.3 percent advance in Intercontinental Exchange Inc.’s Dollar Index (DXY) was the biggest since May. The gauge will average 82.8 this quarter, little changed from 82.7 now, the median of 12 analyst estimates compiled by Bloomberg show. The euro declined against 15 of its 16 major counterparts in July.
Emerging-market bonds rallied, sending yields on local- currency and dollar debt to record lows, as central banks from China to South Africa and Brazil cut interest rates to support economic growth. The JPMorgan GBI-EM Global Diversified Index of local debt returned 1.9 percent, with its yield falling to an all-time low of 5.71 percent on July 20. The EMBI Global gauge of dollar bonds gained 2.6 percent.
“The process of monetary policy easing is becoming broader and more sustained across the emerging markets,” Geoffrey Dennis, an emerging market strategist at Citigroup in New York, said in a July 25 report. “This should eventually cause equity markets to catch up” with bonds, he wrote.
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