Hedge Funds Lifted Wagers to 16-Month High Before Rally

Date: Monday, September 10, 2012
Author: Debarati Roy, Bloomberg

Hedge funds raised bullish commodity bets to the highest in 16 months before speculation that policy makers in the U.S., China and Europe will revive global growth pushed prices higher for a sixth week.

Money managers increased their net-long positions across 18 U.S. futures and options by 2.3 percent to 1.33 million contracts in the week ended Sept. 4, the highest since May 3, 2011, U.S. Commodity Futures Trading Commission data show. Wagers on a silver rally climbed for a sixth week and to the highest since Feb. 28, while those for cocoa jumped 57 percent to the most since May 2010.

U.S. unemployment stayed above 8 percent for a 43rd month in August, and the stagnating labor market means the Federal Reserve will move closer to adding fresh stimulus measures, according to Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co. European Central Bank President Mario Draghi announced a bond-buying program Sept. 6 and China’s government approved plans for 1,254 miles of roads, subway projects in 18 cities and other infrastructure projects.

“The European fears have calmed to an extent, and China may see a bottoming over the next two quarters,” said James Paulsen, the Minneapolis-based chief investment strategist at Wells Capital Management, which oversees about $325 billion. “Commodities have probably turned a corner, and optimism about easing in the U.S. is putting a bid under prices.”

Silver Jumps

The Standard & Poor’s GSCI Spot Index of 24 commodities rose 0.2 percent last week, led by silver, which surged 7.1 percent. The MSCI All-Country World Index of equities advanced 2.5 percent, and the dollar declined 1.2 percent against a measure of six major trading partners. Treasuries lost 0.5 percent, a Bank of America Corp. index showed.

The U.S. economy added 96,000 workers last month, trailing forecasts for a gain of 130,000, Labor Department data show. The report came a week after Fed Chairman Ben S. Bernanke said the job market was a “grave concern.” The central bank probably will give “strong hints” or provide “positive action” at this week’s Federal Open Market Committee meeting, Pimco’s Gross said in a Bloomberg radio interview Sept. 7.

ECB policy makers agreed to an unlimited bond-purchase program to reduce interest rates for struggling nations and fight speculation about a breakup of the 17-nation euro. Andrew Garthwaite, a strategist at Credit Suisse Group AG in London, called the program a “game-changer” in a note Sept. 7.

Global Economy

Actions from central bankers and governments won’t be enough to revive the slowing global economy, according to Jeffrey Sica, the Morristown, New Jersey-based president of SICA Wealth Management who helps oversee more than $1 billion.

China’s manufacturing contracted at the fastest pace since March 2009, an index from HSBC Holdings Plc and Markit Economics showed on Sept. 3, adding to signs of a deepening slowdown in the world’s second-largest economy. A separate manufacturing purchasing managers index released Sept. 1 by the government showed the first contraction since November.

Industrial output in China grew in August at the slowest pace in three years, according to data from the National Bureau of Statistics yesterday. President Hu Jintao said the economy faces “notable downward pressure,” signaling that more stimulus may follow the approvals for road projects and subways.

The euro area’s economy contracted in the second quarter as consumers cut spending and corporate investment slumped, the European Union’s statistics office said Sept. 6. It will keep contracting until the end of the first quarter next year, according to the median of as many as 22 economist estimates compiled by Bloomberg.

‘Dramatic Slowdown’

“We are witnessing a dramatic slowdown in economies like China and Europe, and that is bad news for commodities,” Sica said. “The anticipation and expectations about stimulus is very high, which may or may not materialize. The inability of central banks’ activity to stimulate growth is becoming more and more pronounced.”

The U.S. is the world’s biggest oil and corn consumer, and China is the top user of metals, soybeans and cotton. Europe consumes 18 percent of the world’s copper and accounts for 22 percent of oil demand, data from Barclays Plc and BP Plc (BP/) show.

Investors added $1.13 billion to raw-material funds in the week ended Sept. 5, according to EPFR Global. Precious metals accounted for $685 million of the inflows, the Cambridge, Massachusetts-based company said.

Bull Market

The S&P GSCI surged 92 percent from the end of December 2008 through June 2011 as the Fed kept interest rates near zero and bought $2.3 trillion in government and housing debt. The index has jumped 22 percent since this year’s low on June 22, driving it into a bull market.

Raw materials will gain an additional 10 percent because supplies remain constrained, Jeffrey Currie, Goldman Sachs Group Inc.’s head of commodities research, said in a Bloomberg Television interview Sept. 6. Production of natural gas and copper will fall short of demand this year, Morgan Stanley said in a report Sept. 4. Inventories of corn and wheat will drop as the worst U.S. drought since 1956 hurts crops, the bank said.

Funds increased their bets on higher crude-oil prices for a third straight week to 193,624 contracts, the highest since May 1, the CFTC data show. Crude was little changed at $96.42 a barrel in New York last week, and traded at $96.16 today. Gold holdings climbed 9.9 percent to 144,775, a six-month high. Futures jumped 3.1 percent to $1,740.50 an ounce.

Mine Disruptions

Bullish platinum wagers gained 9 percent to 21,885 contracts, the highest in a year, the CFTC said. Prices rallied 3.8 percent to $1,596.30 an ounce last week, and were at $1,594 an ounce today. Disruptions at mines in South Africa, the largest producer, caused the biggest loss of supply in at least seven years, Deutsche Bank AG estimates.

A measure of 11 U.S. farm goods showed speculators increased bullish bets in agricultural commodities by 1.6 percent to 879,228 contracts.

Chinese corn imports may climb 40 percent to 7 million metric tons in the 12 months starting Oct. 1, Daron Hoffman, Rabobank International’s Shanghai-based director of research, said in an interview last week. The record shipments may continue to lift prices, which touched an all-time high in Chicago on Aug. 10, he said.

“Whatever China is doing should help the economy,” said Peter Jankovskis, who helps oversee $3 billion of assets as co- chief investment officer at Lisle, Illinois-based Oakbrook Investments LLC. “If all this takes root and growth begins to build, it will be very, very bullish.”

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