Bloomberg News

Speculators Cut Holdings to Lowest Since July 2009: Commodities

November 29, 2011

(For more commodity columns, click CMMKT.)

Nov. 29 (Bloomberg) -- Speculators decreased wagers on rising commodity prices to the lowest since July 2009 amid concern that Europe’s inability to contain its debt crisis will crimp demand for raw materials as global growth slows.

Money managers cut combined net-long positions across 18 U.S. futures and options by 25 percent to 562,508 contracts in the week ended Nov. 22, Commodity Futures Trading Commission data show. That’s the biggest decline in eight weeks and the lowest since July 14, 2009. Corn wagers tumbled 25 percent, the most since June 2010, and bets on lower copper prices doubled.

About $4.6 trillion was wiped from the value of global equities this month. Moody’s Investors Service said yesterday the “rapid escalation” of Europe’s crisis threatens all of the region’s sovereign ratings. The Organization for Economic Cooperation and Development yesterday said growing doubts about the survival of the region’s monetary union represents the main risk to the world economy.

“The events in Europe have cast doubt on global economic growth,” said Walter “Bucky” Hellwig, who helps manage $17 billion at BB&T Wealth Management in Birmingham, Alabama. “People are moving out of riskier assets.”

Seventeen of the 24 commodities tracked by the GSCI have dropped in November. The index is still up 0.9 percent this month. Crude oil jumped 7.1 percent, leading gainers that included hogs, feeder cattle, live cattle and coffee.

Equity Losses

The MSCI All-Country World Index of equities has dropped 6.7 percent this month. Treasuries rose 1.2 percent, on a total return basis, Bank of America Corp. indexes show.

The GSCI index is up 3.4 percent in 2011. Commodities are beating equities for a fifth consecutive year, signaling that demand from developing economies is sustaining global growth. The raw-material gauge more than doubled from a four-year low in February 2009 as demand increased in China, the biggest user of everything from energy to copper to cotton.

Commodity demand from emerging markets has “seen some slowdowns, but generally speaking, they have not been at the same level that we saw in 2008,” said Nelson Louie, the global head of commodities at New York-based Credit Suisse Asset Management who helps manage $11.4 billion in commodity-related assets. “From a long-term standpoint, we’re bullish.”

Speculators’ net-long position is more than eight times larger than at the bottom of the slump in 2008, when the GSCI tumbled 43 percent. Still, holdings are down 64 percent from a record 1.56 million contracts in September last year.

JPMorgan, Goldman

JPMorgan Chase & Co., the biggest U.S. bank by assets, cut its recommendation on commodities to “underweight” on Nov. 22, citing policy failures in the U.S. and Europe. The bank lowered its 12-month, total-return forecast for the GSCI to 10 percent from 15 percent and said it expects negative returns in the next three to six months.

Goldman Sachs Group Inc. trimmed its forecast for commodity gains in the next 12 months to 15 percent from 20 percent in a report Nov. 14. The bank has a “neutral” recommendation on commodities for the next three to six months, and “overweight” in 12 months.

Funds increased their bearish copper bets to a net-short position of 7,731 contracts. Speculators are also short on cocoa, soybeans, soybean meal, soybean oil, wheat and natural gas, the CFTC data show.

Open Interest Tumbles

Open interest, or the number of contracts that have yet to be closed, liquidated or delivered, for commodities tracked by the GSCI has tumbled 16 percent since reaching 8.848 million contracts in February, the highest since the data began in February 2006. The figure includes 18 U.S. commodities of the 24 raw materials tracked by the gauge and is based on CFTC data.

As European finance chiefs meet today in Brussels, and Italy seeks to raise as much as 8.8 billion euros ($11.7 billion) in bond sales, economists from Morgan Stanley, UBS AG, and Nomura International Plc say governments and the European Central Bank must step up their crisis response.

The region accounts for about 18 percent of global copper demand and almost 16 percent of aluminum consumption, according to Barclays Capital. Europe uses 15 percent of the world’s oil, the International Energy Agency estimates, and 19 percent of wheat supply, U.S. Department of Agriculture data show.

Global equity and commodity markets rallied yesterday as European leaders drafted a framework for the region’s bailout fund. The MSCI All-Country World Index gained 3.1 percent, and the GSCI climbed 1.4 percent. Today, the equity measure rose as much as 1.1 percent, and the raw-material gauge advanced as much as 1.6 percent.

Deal ‘Hope’

“Whether some consensus comes out of Europe is to be seen,” said Jeffrey Sherman, who helps manage $19 billion for DoubleLine Capital LP in Los Angeles. “What you’re seeing is rallying on hope of a deal, but it seems to fall flat on its face every time they have tried to implement.”

Investors put $615 million into commodity funds in the week ended Nov. 23, according to data from Cambridge, Massachusetts- based EPFR Global, which tracks money flows. Gold and precious- metals inflows contributed $1.26 billion, and non-gold and non- precious metal commodities had net outflows of $645 million, said Cameron Brandt, the director of research.

Breakdown ‘Fears’

“Gold is a good investment to make when there are fears of a breakdown in the European Union,” Brandt said.

Funds trimmed their net-long position in gold for the first time in five weeks, cutting by 13 percent to 149,256 contracts, the government data show. The wagers are still up 15 percent since the end of September.

A measure of 11 U.S. farm goods showed speculators lowered bullish bets in agricultural commodities by 34 percent to 261,477, the lowest since September 2009. Investors turned bearish on soybeans for the first time since July 2010 and hold a net-short position of 8,622 contracts. Net-long positions in corn dropped by 48,543 to 149,084 contracts.

Global grain growers will produce a record 1.843 billion metric tons in 2012, Dan Basse, the president of AgResource, said on Nov. 16.

Soybean imports in China, the biggest consumer, may decline in the year through Dec. 31 as losses from processing the oilseed discourage additional purchases, Shanghai JC Intelligence Co. said on Nov. 23.

“People are inherently short to neutral on the commodities market,” DoubleLine’s Sherman said. “It could change, but for that we need a very strong fundamental reason out of Europe.”

--With assistance from Elizabeth Campbell in Chicago. Editors: Patrick McKiernan, Daniel Enoch

To contact the reporter on this story: Debarati Roy in New York at droy5@bloomberg.net

To contact the editor responsible for this story: Steve Stroth at sstroth@bloomberg.net


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