Hedge funds cut their bets on higher commodity prices by the most in four months on mounting concern that Europe’s debt crisis will derail global growth and curb demand for raw materials.
Money managers lowered net-long positions across 18 U.S. futures and options by 11 percent to 898,022 contracts in the week ended April 17, the most since Dec. 20, data from the Commodity Futures Trading Commission show. Bets on rising sugar prices fell the most in more than three years, while the funds anticipate declines in cotton, wheat, coffee and natural gas.
A surge in unemployment from Spain to Italy to Greece is undermining efforts to quell the region’s debt as borrowing costs rise. U.S. industrial production stalled for a second month in March, the Federal Reserve said April 17. Home prices in China fell last month in a record 37 of 70 cities tracked by the government, data showed April 18. The “super cycle” that drove an almost fourfold gain in commodity prices since the end of 2001 may be ending, Citigroup Inc. said last week.
“Concerns about a global slowdown are growing,” said Walter ‘Bucky’ Hellwig, who helps manage $17 billion of assets at BB&T Wealth Management in Birmingham, Alabama. “The conditions just aren’t favorable for a commodity rally.”
The Standard & Poor’s GSCI Spot Index of 24 raw materials dropped 0.8 percent last week, led by declines in sugar and gasoline. The MSCI All-Country World Index of equities climbed 0.9 percent and Treasuries returned 0.2 percent, a Bank of America Corp. index show.
While commodities are down 1.8 percent in April, heading for the first two-month slump since September, the GSCI index still is up 121 percent since touching a five-year low in February 2009, as the economy emerged from recession and demand improved.
Fourteen of the raw materials tracked by the S&P GSCI retreated last week. Sugar tumbled 5.5 percent for a fourth consecutive loss, while gasoline dropped 6.1 percent, the most since mid-September. Cotton, Brent crude, Kansas wheat, corn, natural gas and nickel all declined more than 2 percent.
The outlook for demand was eroded partly by dimming prospects in Europe. Spanish two-year notes fell for a seventh week, extending the longest run of declines since January 2007. Spain now has an unemployment rate of 23.6 percent, compared with an average of 10.8 percent across the 17-nation euro region.
More Americans than forecast filed claims for jobless benefits in the week ended April 14, the Labor Department said April 19. Sales of previously owned homes unexpectedly dropped in March, data from the National Association of Realtors showed the same day.
Investors put $472 million into commodity funds in the week ended April 18, the most in seven weeks, according to Brad Durham, a managing director at Cambridge, Massachusetts-based EPFR Global, which tracks money flows. Gold and precious-metals outflows totaled $11 million, he said.
The International Monetary Fund raised its global growth forecast for the first time in more than a year on April 17. Industrial production in China expanded 11.9 percent in March, exceeding economists’ forecasts, the government said April 13.
Hedge funds increased their bets on higher prices for West Texas Intermediate, the U.S. benchmark crude grade, by 3.9 percent, the first advance in five weeks. Prices rose 0.2 percent to $103.05 a barrel in New York trading.
Governments pledged more than $430 billion in fresh money to the IMF to help it protect the global economy against the turmoil in Europe, the Group of 20 nations announced when their finance chiefs met in Washington on April 20. The Bank of Japan is “committed” to monetary easing to shore up the economy, Governor Masaaki Shirakawa said April 18.
China’s benchmark Shanghai Composite Index rose 2 percent last week on speculation that the government will increase fiscal spending on infrastructure and cut banks’ reserve requirements to bolster economic growth. China accounts for 40 percent of copper consumption and 11 percent of oil demand, Barclays Capital and the International Energy Agency estimate.
“China will look at some kind of easing,” said Wiktor Bielski, the London-based global head of commodities research at VTB Capital, which manages $2.8 billion of assets. “We will see acceleration in Chinese growth and we are already asking customers to buy those commodities in which China faces a shortage.”
China’s economy expanded 8.1 percent last quarter, the slowest pace in almost three years, the government said April 13. Chinese Premier Wen Jiabao cut the nation’s economic growth target to 7.5 percent last month, the lowest since 2004.
A measure of 11 U.S. farm goods showed speculators lowered wagers on a rally in agricultural commodities by 17 percent to 556,164 futures and options, the biggest slump since Jan. 17.
Speculators have a net-short position of 14,786 contracts in coffee, the most bearish since December 2008, the CFTC data show. Bets on lower cotton prices more than doubled to 7,543. Wagers on a sugar rally tumbled 36 percent to 68,379, the biggest cut since December 2008.
Sugar prices slumped to a 10-month low April 20 on signs of increasing supplies from Brazil, the world’s biggest exporter. Shipments from the South American country may climb 2.4 percent in the season starting May 1, a unit of the U.S. Department of Agriculture said last week.
“We are already in a correction mode,” said Steve Mathews, the chief investment officer of Flintlock Capital Asset Management LLC in New York, which manages $116 million of assets. “The overall mood is bearish. There is a large debt overhang which needs to be resolved before we can have any sustained healthy economic performance.”
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