Hedge funds boosted their bullish commodity bets above 1 million contracts as mounting speculation that China will take more steps to boost growth spurred the longest rally in prices since February.
Speculators raised their net-long positions across 18 U.S. futures and options by 8.9 percent to 1.05 million contracts in the week ended July 10, Commodity Futures Trading Commission data show. That’s the highest since April 3. Wagers on a wheat rally reached a record. The Standard & Poor’s GSCI Spot Index of 24 raw materials climbed for a third consecutive week, jumping 10 percent in the longest winning streak since Feb. 24.
Global equities climbed the most in two weeks on July 13, ending the longest slump since November, after a government report showed China’s economy last quarter slowed to the weakest pace since the global financial crisis, putting pressure on Premier Wen Jiabao to boost stimulus measures. Federal Reserve Bank of Atlanta President Dennis Lockhart said the same day that the central bank may need to begin a new program of asset purchases if recent economic weakness persists.
“The Chinese numbers are telling us that there will be more easing,” said James Paulsen, the chief investment strategist at Wells Capital Management, which oversees about $333 billion of assets. “People realize that the effect of the easing that we saw in some countries will be realized over the next few months. There is a change in the direction of the wind because of a combination of these factors, and probably we are seeing some confidence building.”
The S&P GSCI Index climbed 2.7 percent last week. The MSCI All-Country World Index of equities dropped 0.5 percent, and the U.S. Dollar Index, a measure against six trading partners, slid less than 0.1 percent. Treasuries returned 0.3 percent, a Bank of America Corp. gauge shows. The GSCI index added 1.5 percent to settle at 630.63 in New York today.
Twenty-one of the 24 raw materials tracked by S&P rose last week. The gains were led by corn, which jumped 6.8 percent. Wheat climbed 5.1 percent in Chicago as dry weather parched fields from North Dakota to Russia.
China reduced interest rates in June and July and has lowered reserve requirements for banks three times since November. The country probably will cut the benchmark one-year lending rate again this quarter while making two 50 basis-point cuts in the reserve ratio, according to Tim Condon, the chief Asia economist at ING Financial Markets in Singapore.
The European Central Bank is poised to ease monetary policy, including cutting its deposit rate further if the region’s debt crisis worsens, according to a Medley Global Advisors report. A significant number of members on the ECB’s Governing Council are prepared to take the deposit rate below zero if the economic outlook warrants it, Medley wrote in a note to investors published July 13, without saying how they obtained the information.
Investors withdrew $173 million from commodity funds in the week ended July 11, driven by an outflow of $128 million from gold and precious metals, according to Cambridge, Massachusetts- based EPFR Global, which tracks money flows.
Signs of a flagging recovery mean “the balance of risks to most industrial commodity prices remains to the downside,” analysts at Credit Suisse Group AG led by London-based Ric Deverell said in a report July 11.
A surge in Chinese house deals and a jump in investment may limit the scope of government stimulus programs even amid signs of slowing industrial output. The value of home sales rose 41 percent in June from May, data July 13 showed. The country must “unswervingly” continue its property controls and prevent prices from rebounding, Premier Wen said July 7, according to the official Xinhua news agency.
The world’s most-populous nation accounts for 40 percent of copper consumption and 11 percent of oil demand, Barclays Plc and the International Energy Agency estimate.
“China may be weaker than commonly thought, and it’s very unlikely that we will see a stimulus package similar to the size that we saw in 2008 being introduced,” said John Toohey, a vice president of equities investments with USAA Investments who helps manage about $50 billion.
In November 2008, Wen unveiled a 4 trillion yuan ($586 billion) fiscal injection after the collapse of Lehman Brothers Holdings Inc. caused a credit crunch that crippled global economies. A month later, the Fed cut borrowing costs to a record low and then embarked on two rounds of debt purchases totaling $2.3 trillion through June 2011.
The global aid programs boosted demand for everything from aluminum to pork to soybeans. The S&P GSCI rebounded 50 percent in 2009, the biggest annual gain since at least 1971, after a record 43 percent loss the previous year. The index is up 19 percent since Dec. 31, 2009.
A measure of 11 U.S. farm goods showed speculators raised bullish wagers in agricultural commodities by 16 percent to 785,831 contracts. Money managers increased their wheat net-long positions by 17 percent to 62,468 contracts, the highest since the data begins in June 2006. Funds lifted bets on higher corn prices for a fifth straight week, the longest stretch since September 2010.
The U.S. Department of Agriculture on July 11 cut its outlook for world wheat output by 1 percent as the forecast for Russia’s crop was lowered by 7.5 percent. Prices in Chicago have surged 41 percent since June 15 and are at the highest since February 2011.
Funds increased sugar holdings by 76 percent to 100,511 contracts, the biggest jump since December 2007, the CFTC data show. Prices in New York rose to the highest since mid-April last week on concern that global supplies will remain limited after wet weather delayed cane crushing in Brazil, the world’s largest producer and exporter.
Speculators reduced net-long positions in crude by 5.1 percent, extending the decline since the end of February to 53 percent. Oil traded in New York jumped 3.8 percent to $87.10 a barrel in the following three days.
“China will manage its slowdown with more easing,” said Michael Strauss, who helps oversee about $26 billion of assets as the chief investment strategist at Commonfund in Wilton, Connecticut. “With continued easing, we will definitely see higher prices.”
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