Hedge funds cut bullish commodity bets for the first time this month as weaker manufacturing from China and Europe eclipsed central banks’ efforts to boost growth, driving down prices the most since June.
Money managers decreased their net-long positions across 18 US futures and options by 1.7 per cent to 1.31 million contracts in the week ended September 18, halting two weeks of gains that had sent holdings to a 16-month high, US Commodity Futures Trading Commission data show. The Standard & Poor’s GSCI Spot Index of 24 raw materials dropped 4.4 per cent last week, the first retreat since the end of July.
Chinese manufacturing may contract for an 11th month in September, and euro-area services and output plunged to a 39- month low, according to reports on September 20. US jobless claims were higher than expected by analysts, Labor Department data showed. Global equity markets lost $603.2 billion of value last week amid increasing concern that the Federal Reserve, European Central Bank, People’s Bank of China and the Bank of Japan have failed to do enough to accelerate growth.
“A structural shift in China’s economy and European economic woes will put pressure on prices of commodities,” said Chad Morganlander, the Florham Park, New Jersey-based fund manager at Stifel Nicolaus & Co, which oversees about $120 billion of assets. “China over the last few years has artificially torqued their economy, which has created demand for industrial commodities and energy. The world is starting to see sobering signs of a hangover from those actions.”
Commodities drop
The drop by the S&P GSCI last week was the first since July 27. The MSCI All-Country World Index of equities fell 0.7 per cent last week, and the dollar gained 0.6 per cent against a measure of six major trading partners. Treasuries returned 0.5 per cent, a Bank of America Corporation index showed.
Nineteen commodities tracked by the S&P GSCI fell last week, led by a 6.7 per cent drop in soybeans and a 6.2 per cent plunge in crude oil. Cocoa declined 4.6 per cent and corn slid 4.3 per cent. The gauge extended losses today, falling 0.7 per cent to 659.34 after earlier retreating as much as 0.9 per cent as crude oil, base metals and grains declined.
China’s equities slumped after the purchasing managers’ index report by HSBC Holdings Plc and Markit Economics showed the gauge fell to 47.8 so far this month from 47.6 in August, poised for the longest streak below the expansion-contraction line of 50 in the survey’s eight-year history. China is the world’s biggest consumer of everything from copper to pork to soybeans. The US is the largest user of crude oil and corn.
The Shanghai Composite Index fell 4.6 per cent last week, the most since the end of October, on the manufacturing report and escalating tension with Japan over ownership of islands in the East China Sea that may threaten trade.
Auto slump
Dongfeng Automobile Co, which makes light trucks in China with Nissan Motor Co., slumped to the lowest in 11 months as a Japanese auto group said the island dispute will hurt car sales. Jiangxi Copper Co, the country’s biggest copper producer, fell 2.1 per cent last week, the first decline since August 31.
China’s largest ship owners said on September 21 that a slump may continue as more vessels enter service and economic growth slows. The industry globally probably won’t “bottom out” for at least another two years, said Xu Lirong, the general manager of China Shipping Group Co, the country’s second-largest shipping company.
Euro-area services and manufacturing output fell as European leaders struggled to reverse the single-currency bloc’s slide into recession, London-based Markit Economics said. A composite index based on a survey of purchasing managers in both industries in the 17-nation euro area dropped to 45.9 from 46.3 in August, the lowest since 1973 and below economists’ forecast for a reading of 46.6, Markit said.
European recession
The euro-area’s economy is heading for a second straight quarterly contraction after a 0.2 per cent decline in the three months through June, as fallout from the debt crisis damps consumer spending and corporate investment. ECB President Mario Draghi pledged September 6 an unlimited bond-purchase program to regain control of interest rates and fight speculation of a currency breakup.
Advances in commodities may be ending on mounting concern that the Federal Reserve’s plan to revive US economic growth won’t work. The central bank said September 13 that it will buy $40 billion of mortgage debt a month and hold the benchmark interest rate near zero per cent through at least mid-2015. The moves are the Fed’s third round of stimulus, known as quantitative easing.
‘Debt problems’
“It is very clear that Europe’s economic and debt problems are by no means behind us,” said Adrian Day, who manages about $170 million of assets as president of Adrian Day Asset Management in Annapolis, Maryland.
“For stimulus to have a meaningful, sustained impact on commodities other than gold, stimulus must translate into great economic activity, and that has not happened so far.”
Output concerns globally will underpin commodity prices, and they will rally, said Jonathan Guyer, the chief investment officer of Longview Funds Management LLC in Columbia, Maryland, which oversees about $19 million of assets.
“There are many drivers of commodities returns, including weather issues and supply disruptions,” Guyer said.
Prices will continue to get a boost as the worst US drought since 1956 curbs grain and oilseed production and as tension in the Middle East crimp oil output, he said.
Investors added $2.36 billion to raw-material funds in the week ended September 19, according to EPFR Global. Precious metals accounted for $1.8 billion of the inflows, the Cambridge, Massachusetts-based company said.
Gold Holdings
Funds increased their bets on higher crude prices by 5.6 per cent to 214,647 contracts, the fifth consecutive gain. Prices dropped to a six-week low of $90.66 a barrel on September 20.
Gold holdings rose 7.7 per cent to 178,426 contracts, the fifth straight advance and the most since February 28, CFTC data show. Futures, which rose to $1,790 an ounce on September 21 in New York, the highest since February 29, dropped today as much as 1.1 per cent before trading down 0.8 per cent at $1,763.40 an ounce.
A measure of 11 US farm goods showed speculators decreased bullish bets in agricultural commodities by 7.3 per cent to 774,580 contracts, the second decline and the biggest since June. Soybean futures reached a five-week low of $16.075 a bushel on the Chicago Board of Trade. Cocoa slid to $2,521 a metric ton on ICE Futures US in New York.
“The commodity super-cycle is over,” said Jack Ablin, who helps oversee about $60 billion of assets as chief investment officer of BMO Private Bank in Chicago. “In the past 10 years, we’ve seen a spectacular move into commodities. We don’t think we’ll see a repeat of that.”