Commodities Lead Gains as Emerging Markets Drop
Commodities beat bonds, stocks and the dollar for a third month, the longest winning streak in two years, as the prospect of military strikes in Syria boosted oil and gold. Emerging markets declined as currencies plunged from Brazil to Turkey to India.
The Standard & Poor’s GSCI Total Return Index of 24 raw materials rose 3.4 percent in August as U.S. crude reached a two-year high and gold rallied close to a bull market. The MSCI All-Country World Index (SPX) of equities in 45 markets fell 2 percent including dividends and the U.S. Dollar Index, a measure against six trading partners, gained 0.8 percent. Bonds of all types lost 0.352 percent on average, according to Bank of America Merrill Lynch’s Global Broad Market Index of 20,000 fixed-income securities.
Raw materials erased this year’s losses after data signaled faster growth in Europe, the U.S. and China. They extended gains as western nations debated attacking Syria after accusations the government used chemical weapons against its own people, increasing concern about disruptions to Middle East oil supply. Investors withdrew about $44 billion from emerging-market stock and bond funds since the end of May, Cambridge, Massachusetts-based EPFR Global, which tracks money flows, said Aug. 23.
“There is definitely a stealth recovery going on in commodities,” said James Paulsen, the Minneapolis-based chief investment strategist at Wells Capital Management, which oversees about $340 billion of assets. “Bonds are getting killed, and stocks stopped going up as a result of the re-pricing going on in bonds. Things are still good enough to prevent stocks from going down a lot.”
A Chinese gauge of manufacturing rose to a 16-month high in August as new orders jumped and overseas demand rebounded. China is the biggest consumer of everything from coal to copper. The 17-nation euro-region emerged from its longest-ever recession in the second quarter and U.S. economic growth accelerated as unemployment declined.
West Texas Intermediate, the U.S. oil benchmark, advanced 2.5 percent to $107.65 a barrel in August, rising for a third month. Brent, its European equivalent, added 5.9 percent to $114.01, the biggest gain in a year. The two grades account for almost half of the S&P GSCI. WTI fell 0.8 percent today.
A strike on Syria could drive Brent as high as $130, Bank of America Corp. said Aug. 29. Russia, an ally of Syria that has a veto on the United Nations Security Council, blocked previous UN action against Syria. Iran Foreign Ministry spokesman Abbas Araghchi warned Aug. 27 that a military strike would have “great consequences for the region.” President Barack Obama said Aug. 31 he will seek congressional authorization to use military force against Syrian regime targets.
Gold rose 5.3 percent to $1,395.15 an ounce in London, paring this year’s loss to 17 percent. While the metal is still 27 percent below the record set in 2011, some investors are buying to hedge against faster inflation should energy prices keep rising. Gold will average $1,295 in the fourth quarter, the median of 26 analyst estimates compiled by Bloomberg shows. It fell 0.3 percent to $1,392 today.
Silver surged 18 percent to $23.5225 an ounce, the biggest gain among commodities. Holdings in exchange-traded products reached a record as investors bought the metal both as a hedge against inflation and as a bet on a stronger economy because about half goes into industrial applications. Prices will average $21 in the fourth quarter, the median of 21 analyst estimates compiled by Bloomberg shows.
Hedge funds and other large speculators are the most bullish on raw materials since February, according to Commodity Futures Trading Commission data across 18 U.S. futures compiled by Bloomberg. Combined open interest, or contracts outstanding, across the members of the S&P GSCI expanded for the first time in three months, rising 1 percent to 13.16 million contracts, the most recent data compiled by Bloomberg show.
The strengthening U.S. economy heightened speculation the Federal Reserve will cut its monthly $85 billion bond purchases, with 65 percent of economists in an Aug. 9-13 Bloomberg survey predicting that outcome when officials meet Sept. 17-18. Stocks, bonds and commodities fell and the dollar rose as minutes of the Fed’s July meeting released Aug. 21 showed policy makers supported stimulus cuts this year if the economy improves.
“Investors have been skeptical and focusing on the negative of Fed tapering,” said Leo Grohowski, chief investment officer of New York-based BNY Mellon Wealth Management, which oversees more than $175 billion of assets. “They are forgetting a less accommodative Fed means the economy is on a better footing and for us, what it does is give us great confidence in our earnings forecasts.”
A Bloomberg measure of the combined market capitalization of global equity markets fell $1.3 trillion, or 2.3 percent, to $55 trillion. The Standard & Poor’s 500 Index retreated from the record 1,709.67 set Aug. 2, dropping 3.1 percent, the most since May 2012. The gauge is still up 14 percent for the year, on track for the best annual performance since 2009.
Utilities, telecommunications providers and companies that produce consumer staples helped lead the S&P 500 lower in August as rising Treasury yields reduced demand for dividend stocks. The three groups offer at least 3 percent in dividend yields, compared with a 2.79 percent yield for 10-year Treasury bonds.
The S&P 500 will finish the year at 1,683, or a 3.1 percent gain from the last close, according to the average estimate from 18 strategists surveyed by Bloomberg.
The MSCI Emerging Markets Index dropped 1.9 percent, extending its retreat this year to 12 percent. Indexes tracking stocks in the Philippines, Indonesia and Turkey plunged more than 8 percent. Turkey’s Borsa Istanbul 100 index fell 9.5 percent.
Foreign investors withdrew a combined $2.2 billion from equities in Thailand, Indonesia and the Philippines. Thailand’s economy contracted in the second quarter, while Indonesia’s current-account deficit widened to a record, government data showed.
Indonesia’s rupiah weakened 5.9 percent against the dollar and India’s rupee tumbled 8.1 percent, the biggest monthly retreat since 1992. Rising crude prices threaten to worsen the record current-account gap in India, which imports about 80 percent of its oil.
Brazil’s local-currency bonds lost 2.9 percent, according to the JPMorgan GBI EM Brazil Index, as the real weakened and the central bank raised its benchmark interest rate by half a percentage point for a third consecutive meeting. The Bloomberg USD Emerging Market Sovereign Bond Index (BEMS) dropped 2.9 percent.
The weakening in the currencies of countries with large current-account deficits, such as the rupee and lira, have “scope to continue as capital inflows into emerging markets remain weak,” Goldman Sachs Group Inc. wrote in a report Aug. 28. The rout in emerging market bonds and currencies may be easing as Treasury yields stabilize, Charlie Robertson, the London-based global chief economist at Renaissance Capital, wrote in a report a day later.
Treasuries fell 0.539 percent, a fourth monthly decline. Yields on 10-year U.S. government debt will be little changed at 2.73 percent by the end of the year, from 2.79 percent now, according to the median estimate of 66 economists surveyed by Bloomberg News. The Commerce Department raised its estimate for second-quarter growth to 2.5 percent from 1.7 percent on Aug. 29. Unemployment has dropped to 7.4 percent, from 8.2 percent a year ago.
Bank of America Merrill Lynch’s Global Broad Market Index, tracking debt securities with a market value of about $44 trillion, declined 1.248 percent this year. Average yields rose seven basis points, or 0.07 percentage point, last month to 2.1 percent. High-yield (BHYC) bonds declined 0.7 percent after gaining 2.3 percent in July, according to the Bloomberg Global High Yield Corporate Bond Index. Speculative-grade debt is rated below Baa3 by Moody’s Investors Service and BBB- by S&P.
U.K. bonds were the best performers in dollar terms among the 26 sovereign markets tracked by Bloomberg and the European Federation of Financial Analysts Societies, rising 1.08 percent. Japan’s were second with a 0.23 percent gain while South African debt lost the most with a 5.66 percent decline followed by a 4.73 percent retreat for Norway.
“You have two major contributing factors to the uneven performance numbers of August,” said Chad Morganlander, a Florham Park, New Jersey-based fund manager at Stifel Nicolaus & Co. whose company oversees about $130 billion of assets. “A monetary repositioning is a certainty going into the latter half of the year, courtesy of the Federal Reserve. Geopolitical unrest in Syria has bolstered demand for commodities as a flight-to-safety trade has to some degree kicked in.”
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