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Hedge Funds Add Wagers in Longest Streak Since 2009: Commodities

Date: Monday, July 30, 2012
Author: Joe Richter, Bloomberg

Hedge funds raised commodity bets in the longest bullish streak in three years as speculation that policy makers will increase economic stimulus drove prices toward the biggest monthly rally since October.

Money managers raised their net-long positions across 18 U.S. futures and options by 3.4 percent to 1.17 million contracts in the week ended July 24, U.S. Commodity Futures Trading Commission data show. Wagers gained for seven weeks, the longest increase since June 2009. Corn bets climbed to the highest since September 2011, and traders are the most bullish on natural gas since October 2006.

July 27 (Bloomberg) -- John Taylor, chairman and chief executive officer of FX Concepts LLC, talks about the European debt crisis, the U.S. economy and Federal Reserve policy. Taylor, speaking with Sara Eisen on Bloomberg Television's "Money Moves," also discusses the outlook for currencies. (Source: Bloomberg)

Investors added bets even as commodities fell 0.4 percent in the week to July 24. The bulls were proved right after prices rebounded 1.8 percent in the following three days as European Central Bank President Mario Draghi pledged to protect the euro on July 26. German Chancellor Angela Merkel and French President Francois Hollande echoed his comments the next day. A U.S. government report on July 27 showed the world’s biggest economy grew at a slower pace in the second quarter, increasing pressure on the Federal Reserve to boost aid measures.

“Some of these issues that have been weighing against commodities, particularly industrial metals and energy, have probably over-emphasized the negative,” said Bill O’Neill, the chief investment officer for the Europe, Middle East and Africa at Merrill Lynch Wealth Management, which oversees more than $1.8 trillion. “The fundamental backup is the policy easing.”

July Rally

The Standard & Poor’s GSCI Spot Index jumped 7.5 percent this month, on course for the biggest gain since October. The MSCI All-Country World Index of equities climbed 1.4 percent in July, and the dollar gained 1.5 percent against a measure of six major trading partners. Treasuries returned 0.7 percent, a Bank of America Corp. index shows.

Seventeen of the 24 commodities tracked by the S&P GSCI gained this month, led by a 28 percent surge in corn. Wheat futures jumped 21 percent in Chicago, heading for the biggest advance in two years.

The ECB’s Draghi will hold talks with Bundesbank President Jens Weidmann in the next several days in an effort to overcome the biggest stumbling block to new measures including bond purchases, two central bank officials said, Bloomberg reported July 27. The ECB’s Governing Council and the Bank of England’s Monetary Policy Committee meet this week.

Fed Meeting

Fed policy makers are scheduled to announce an interest- rate decision at the end of a two-day meeting on Aug. 1. The central bank may signal plans for additional monetary stimulus, John Taylor, the founder of currency-hedge fund FX Concepts LLC, said in a Bloomberg Television interview July 27.

The actions from central bankers may not be enough to stem declines in commodities, said Jack Ablin, who helps oversee about $60 billion of assets as chief investment officer of BMO Harris Private Bank in Chicago.

“Draghi is ramping up the rhetoric, but we’re back to the rhetoric stage,” Ablin said. “For the second half, I see a very cloudy picture. I have a difficult time making a bet right now” on commodities, he said.

Price gains may slow in the next several months as global manufacturing slows, Credit Suisse Group AG analysts led by Tobias Merath said in a report July 25. In June, China’s Purchasing Managers’ Index fell to 50.2, the weakest pace this year, the Beijing-based National Bureau of Statistics and the China Federation of Logistics and Purchasing said July 1.

$815 Million

Investors pulled $815 million from raw-material funds in the week ended July 25, the most in nine weeks, according to EPFR Global, which tracks money flows. Gold and other precious- metal outflows totaled $585 million, also a nine-week high, the Cambridge, Massachusetts-based company said.

Wagers on a crude-oil rally climbed 5.6 percent to 140,636 contracts, the highest since May 8, CFTC data show. Bullish sugar bets jumped 17 percent to 128,093 contracts, the most since March 27.

Speculators have got more bullish on commodities since prices last quarter posted the biggest loss since 2008. The number of contracts outstanding across the 24 members of the S&P GSCI rose 0.5 percent in July, poised for the biggest monthly gain since March, according to data compiled by Bloomberg.

Consumption Gains

Commodity assets under management totaled $404 billion in June, up 1.2 percent since the end of 2011 and more than double the amount in 2007, according to data from Barclays Plc. The S&P GSCI surged 85 percent since Dec. 31, 2008.

The Fed lowered interest rates to a record in December 2008 and bought $2.3 trillion in government and housing debt through June 2011 in two rounds of so-called quantitative easing.

Monetary easing and other government efforts to revive the recovery makes growth more likely for later this year and in 2013, Caterpillar Inc. (CAT) Chief Executive Officer Doug Oberhelman said in a statement July 25. The Peoria, Illinois-based company, considered a U.S. economic bellwether because it’s the world’s largest maker of construction and mining equipment, raised its full-year earnings-per-share forecast by about 1.1 percent.

A measure of 11 U.S. farm goods showed speculators raised bullish wagers in agricultural commodities by 3.8 percent to 856,446 contracts, the highest since Sept. 6, 2011. Bets on a corn rally climbed 19 percent to 279,385 contracts. Wheat holdings jumped 9.6 percent to a record 79,649 contracts.

Dry weather has scorched crops from Russia to the U.S., sending corn and soybean prices to records on July 23. About 64 percent of the U.S. was in moderate to severe drought last week, the U.S. Drought Monitor said July 26. The International Grains Council cut its forecast for Russian wheat production by 8.2 percent on the same day.

“Now is a good time to build commodity positions,” said Jonathan Guyer, the chief investment officer of Longview Funds Management LLC in Columbia, Maryland, which oversees about $19 million of assets. “There’s a brighter outlook for Europe to fix its woes and for the U.S. to fix its woes, and for the global economy to begin to emerge” from a slowdown, he said.

To contact the reporters on this story: Joe Richter in New York at jrichter1@bloomberg.net