Hedge Funds Reduce Wagers After Longest-Ever Rally: Commodities

Date: Monday, August 13, 2012
Author: Debarati Roy, Bloomberg

Hedge funds trimmed bets on a commodity rally for the first time in nine weeks as signs of U.S. growth and speculation that central banks will do more to stimulate economies drove prices to a three-month high.

Money managers lowered their net-long positions across 18 U.S. futures and options by 1.9 percent to 1.2 million contracts in the week ended Aug. 7, U.S. Commodity Futures Trading Commission data show. The decline ended eight consecutive weeks of gains, the longest streak on record. Soybean wagers dropped by the most since early June just as prices surged for three days and reached a two-week high.

Soybean wagers dropped by the most since early June just as prices surged for three days and reached a two-week high. Photographer: Paulo Fridman/Bloomberg

Aug. 10 (Bloomberg) -- Richard Clarida, global strategic adviser at Pacific Investment Management Co., talks about the impact of Federal Reserve stimulus measures on the U.S. economic recovery. Clarida, speaking with Tom Keene, Sara Eisen and Scarlet Fu on Bloomberg Television's "Surveillance," also discusses the euro-zone debt crisis. (Source: Bloomberg)

U.S. jobless claims unexpectedly declined in the week ended Aug. 4, the Labor Department said Aug. 9. Prices for single- family homes rose in most U.S. cities last quarter, a private report showed the same day. More than $615 million was added to global equity markets last week amid expectations that European Central Bank President Mario Draghi will pursue a plan to boost the region’s economies and that slowing growth will prompt Chinese leaders to increase aid measures.

“The direction of economic activity and industrial output may have seen a near-term bottom and may get an uptick later this year or in early 2013,” said Bob Lyon, who helps manage $42.2 billion at Toronto-based AGF Management Ltd. (AGF/B) “The data is getting better at the margins in the U.S., and with hopes of more easing coming in,” prices are rallying, he said.

Equity Index

The Standard & Poor’s GSCI Spot Index rose 1.3 percent last week, reaching a three-month high on Aug. 9. The MSCI All- Country World Index of equities advanced 1.6 percent, and the dollar gained 0.2 percent against a measure of six major trading partners. Treasuries lost 0.2 percent, a Bank of America Corp. index showed.

Fifteen of the 24 commodities tracked by S&P advanced last week, led by cattle, energy and cocoa. Corn jumped to a record $8.49 a bushel on Aug. 10 as the worst U.S. drought since 1956 scorched crops, and fell 0.7 percent to $8.04 today.

Jobless claims dropped by 6,000 to 361,000 in the week ended Aug. 4, Labor Department data showed. Economists surveyed by Bloomberg expected a gain to 370,000. Payrolls rose last month by the most since February. The median sale price for U.S. single-family homes increased from a year earlier in 110 of 147 metropolitan areas measured, the National Association of Realtors said Aug. 9.

ECB Plan

German Chancellor Angela Merkel’s government backed the ECB’s bond-buying plan, her deputy spokesman, Georg Streiter, said Aug. 6. Draghi pledged Aug. 2 to do whatever it takes to preserve the euro. Federal Reserve Bank of San Francisco President John Williams said he’s convinced it’s time for the central bank to undertake more debt purchases, the San Francisco Chronicle reported Aug. 10.

Fed policy can’t resolve the biggest drags on the U.S. economy, Richard Clarida, global strategic adviser at Pacific Investment Management Co., said in a Bloomberg Television interview Aug. 10. U.S. monetary policy can’t stem the impact of the slowdown in China and the turmoil in Europe, said Clarida, of Newport Beach, California-based Pimco, manager of the world’s biggest bond fund.

Factory output in Germany dropped 0.9 percent in June, the Economy Ministry said on Aug. 8, while French industrial output stagnated in the same month, government data showed on Aug. 10. China’s exports increased 1 percent in July from a year earlier, missing all estimates in a Bloomberg survey of economists, according to a government report on Aug. 10.

‘Growth Issues’

“The view on commodities is closely tied to macro-economic developments, and until the structural problems in Europe are taken care of, there will be growth issues,” said John Toohey, a vice president of equities investments with USAA Investments who helps manage about $50 billion in San Antonio. “Europe needs to be mended before commodities can really take off.”

Inflows to raw-material funds totaled $736 million in the week ended Aug. 9, according to EPFR Global, which tracks the funds. Inflows into precious metals accounted for $626.8 million, the Cambridge, Massachusetts-based company said.

Investors became more bearish on copper, missing the metal’s first gain in four weeks, the CFTC data show. Net-short positions, or bets on declines, jumped to 8,203 futures and options contracts by Aug. 7, from 6,664 a week earlier. Prices climbed 0.7 percent last week on increasing speculation that China will act to bolster its economy.

China Easing

The odds that China’s government will accelerate policy easing or stimulus are “surely on the rise,” Lu Ting, the head of Greater China economics at Bank of America in Hong Kong, said in a note on Aug. 10. The central bank may cut banks’ reserve requirements soon and another interest-rate reduction is “in the pipeline,” Lu said.

Speculators cut gold holdings by 11 percent to 85,510 contracts, the second drop in three weeks, CFTC data show. Prices climbed 0.8 percent on concern that global stimulus measures will accelerate inflation. Holdings in exchange-traded products backed by bullion climbed to a record 2,417.32 metric tons on Aug. 10, data tracked by Bloomberg show.

A measure of 11 U.S. farm goods showed speculators’ bullish bets in agricultural commodities fell 4.3 percent to 846,643 contracts, CFTC data showed.

Soybean Rally

Money managers lowered wagers on a soybean rally by 6.8 percent to 224,734 futures and options, CFTC data show. Prices climbed 0.9 percent last week, the seventh gain in eight weeks, as dry weather wilted crops. Farmers will harvest 2.692 billion bushels (73.3 million tons), down from 3.056 billion in 2012 and the lowest since 2007, the U.S. Department of Agriculture said Aug. 10. That’s the largest August cut in output since at least 1974, USDA data show.

“Global soybean demand has persisted at an unsustainable rate,” Luke Chandler, the global head of commodities for Rabobank in London, wrote in a report. U.S. exporters sold 290,000 tons of soybeans to China, the biggest importer and consumer, the USDA said Aug. 10.

“The fundamentals are taking the prices higher, and of course, the story is not very pretty since weather is likely to continue to affect output,” said Jeffrey Sherman, who helps manage about $40 billion for DoubleLine Capital in Los Angeles. “We continue to remain bullish in the agriculture space.”

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