Hedge funds raised their wagers on higher commodity prices by the most since July 2010 after signs of accelerating U.S. growth bolstered optimism that demand for raw materials will strengthen.
Money managers expanded their combined net-long positions across 18 U.S. futures and options by 25 percent to 671,915 contracts in the week ended Jan. 3, Commodity Futures Trading Commission data show. Bullish bets on cotton rose the most since April 2009 and those on coffee doubled. Crude-oil holdings reached a three-week high.
Prices for metals and bulk commodities such as coal rose at least 85 percent of the time since 2004 when global industrial production strengthened, Macquarie Group Ltd. estimates. U.S. unemployment fell to the lowest in almost three years, and it joined China, Australia, Germany, India and the U.K. in reporting manufacturing gains. Almost $253 billion was added to the value of global equities last week on speculation economies will skirt a slump as Europe’s debt crisis deepens.
“You’ve been seeing a risk-on trade across the board, not just in commodities,” said John Bailey, the founder and chief executive officer of Stamford, Connecticut-based Spruce Private Investors LLC, which advises investors holding about $3 billion of assets. “Between a calming in Europe and better-than- expected numbers in the U.S., including employment and housing, that has led to a risk-on attitude among managers.”
The Standard & Poor’s GSCI Spot Index of 24 raw materials rose 2.6 percent last week and reached a seven-week high on Jan. 5. The MSCI All-Country World Index gained 0.8 percent, touching a one-month high on Jan. 4. The U.S. Dollar Index, a measure against six trading partners, added 1.3 percent, and the yield on 10-year Treasuries advanced 0.8 percentage point, Bloomberg Bond Trader prices show.
Thirteen of the 24 raw materials tracked by the GSCI gauge advanced, led by a 5.3 percent gain in Brent crude, a 4.6 percent increase in heating oil, and a 4.7 percent jump in gasoil. Cotton increased 4.4 percent, the third consecutive advance, and gold rallied 3.2 percent, the biggest gain since the week ended Dec. 2.
The U.S. expanded at a rate of 1.8 percent in 2011 and will probably grow 2.1 percent in 2012, according to the median of 70 economist estimates compiled by Bloomberg. Employers added more workers to payrolls than projected in December, Labor Department figures showed on Jan. 6. Manufacturing expanded in December at the fastest pace in six months, the Institute for Supply Management said on Jan. 3.
‘Economy Is Back’
“The economy is back,” Chris Rupkey, the chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd., wrote in a report Jan. 6. “Despite some evidence of slowing in places like Canada, Brazil, China, and of course Europe, the prospect for continued growth in the U.S. is a bright one.”
The S&P GSCI Spot index rallied 16 percent since reaching a 10-month low in October on signs of increasing optimism for economic growth. President Barack Obama said Jan. 6 that the U.S., the world’s biggest economy, is “starting to rebound,” after the Labor Department reported that the unemployment rate fell to 8.5 percent, the lowest since February 2009.
For all of 2011, U.S. employers added 1.64 million workers, the most since 2006, after an increase of 940,000 in 2010. Even with the gains, little headway has been made in recovering the 8.75 million jobs lost during the recession that ended in June 2009.
The S&P GSCI Total Return Index is still 13 percent below the 29-month high reached in April, and 2011 marked the first annual slump for the measure since the recession. On Jan. 6, the dollar rose to a 13-month high against a basket of major currencies, curbing the investment appeal of raw materials, which are typically priced in the currency.
Investors pulled $689.4 million from commodity funds in the week ended Jan. 4, according to data from Cambridge, Massachusetts-based EPFR Global, which tracks money flows. Gold and precious-metals outflows totaled $193.4 million, said Brad Durham, the managing director of research. The outflows were smaller than the previous week, when investors withdrew $936 million from commodity funds, he said.
Funds cut their bearish bets on copper by 50 percent to a net-short position of 2,011 contracts. That’s the least bearish since the week ending Nov. 8. Barclays Capital raised its forecast for this year’s shortage in copper supply on Jan. 6, citing import demand from China, the world’s biggest user of the metal, and mine disruptions.
“Some of the risk-on trade is back because the economy here is doing better,” said Michael Strauss, who helps oversee about $27 billion of assets as chief investment strategist at Commonfund in Wilton, Connecticut. “China seems to be managing their process better, and Europe has shown some signs of at last recognizing and at least trying to address their problems.”
Bets on higher cotton prices surged by 8,303 to 14,986 contracts, the CFTC data show. Cotton traded on ICE Futures U.S. in New York increased in seven of the past eight sessions. The Confederation of Indian Textiles Industry said Jan. 5 that production in the country, the world’s largest exporter after the U.S., may be smaller than forecast.
“It could be another year on for cotton in general,” said Peter Sorrentino, a senior fund manager at Huntington Asset Advisors in Cincinnati who helps oversee $14.5 billion of assets. “Some of these things are definitely under-owned. Prices could see a spike on just shortfalls in supply.”
A measure of 11 U.S. farm goods showed speculators raised bullish bets in agricultural commodities by 35 percent for a second consecutive week, reaching 368,783, the highest since the week ended Nov. 15. Corn wagers rose 30 percent to 192,500, the biggest gain since the week ended July 13, 2010. Net-long positions in soybeans increased 39 percent to 33,020, the most bullish holding since early November.
Speculators raised bets on higher crude-oil prices by 4.1 percent to 200,307 contracts, the CFTC data show. Wagers on heating oil rose 34 percent, the most since October, and gasoline bets gained 9.9 percent. Crude traded on the New York Mercantile Exchange exceeded $102 a barrel every day last week, peaking at $103.74 on Jan. 4, the highest since May 11.
“‘There was definitely a cleaning house of sorts in many commodities towards the end of the year, and that resulted in shorter-term oversold conditions in some commodities,’’ said Michael Cuggino, who helps manage about $15 billion of assets at Permanent Portfolio Funds in San Francisco. ‘‘It’s not surprising to me that buying has perked up a little bit early in the new year. The global growth story is still there.’’
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