Hedge Funds’ Fourth Bullish Week Boosts Copper Bets

Date: Monday, February 11, 2013
Author: Debarati Roy, Bloomberg

Hedge funds increased bullish commodity bets for the fourth straight week and became the most bullish on copper since December on signs of faster growth in the U.S. and China.

Speculators boosted net-long positions across 18 U.S. futures and options in the week ended Feb. 5 by 11 percent to 885,655 contracts, marking the longest stretch of gains in more than six months, U.S. Commodity Futures Trading Commission data show. Traders lifted bullish wagers on everything from copper to platinum, corn and soybeans.

A gauge of prices for 18 commodities most tied to economic growth, including burlap and steel, reached the highest since September 2011 at the end of January as global manufacturing gained. In China, the world’s top consumer of cotton, copper and pork, trade grew more than analysts forecast, the government said Feb. 8. Service industries in the U.S., the biggest user of crude oil and corn, expanded more than analysts predicted in January, a private survey showed Feb. 5.

“With China and the U.S. registering growth, the economically sensitive commodities will do well,” said Michael Strauss, who helps oversee about $26 billion as chief investment strategist at Commonfund in Wilton, Connecticut. “The global environment is favorable for commodities.”

Markets Rally

The Standard & Poor’s GSCI gaugeof 24 raw materials traded within 0.1 percent of a four-month high on Feb. 8, before ending the week little changed. The commodity gauge is up 4.4 percent in 2013. The MSCI All-Country World Index of equities climbed 4.6 percent, while the dollar rose 0.6 percent against a basket of six trading partners. Treasuries fell 0.8 percent, a Bank of America Corp. index shows. The GSCI was little changed today.

Exports from China advanced 25 percent in January from a year earlier and imports rose 29 percent, according to government data. Passenger-vehicle sales surged 49 percent to a monthly record, a state-backed group said Feb. 7. The average automobile contains about 50 pounds of copper and 4 grams (0.13 troy ounce) of palladium, platinum or rhodium, according to the International Copper Study Group and Johnson Matthey Plc.

The U.S. non-manufacturing index for January was at 55.2, compared with analyst estimates for a reading of 55, the Institute for Supply Management said. Readings above 50 signal expansion. The group’s employment gauge was the strongest in seven years.

Red Oak

The JoC-ECRI Industrial Price Index, which tracks 18 industrial commodities from plywood to cattle hides, is up 10 percent from a three-month low in November. The measure, begun in 1985 by Geoffrey Moore, founder of the Economic Cycle Research Institute and a mentor to former Federal Reserve Chairman Alan Greenspan, can be used as a leading indicator for global production. Nine components, including ethylene and red oak, aren’t traded on U.S. exchanges and are less influenced by investor sentiment.

The debt crisis in Europe will be a drag on world economies and limit commodities demand, said Stanley Crouch, who helps oversee $2 billion of assets as chief investment officer at New York-based Aegis Capital Corp.

European Central Bank President Mario Draghi said Feb. 7 that the risks to the region’s economy remain to the downside. The continent uses about 18 percent of the world’s copper, Barclays estimates, and accounts for 22 percent of oil consumption, according to data from BP Plc.

Europe Risks

“The problems in Europe have not been fixed,” Crouch said. “Since China is heavily dependent on exports, the slowdown in Europe will continue to weigh on China. I would say there will be a systemic retracing of the risk-asset complex and commodities will come lower.”

Money managers added a net $307 million to commodity funds in the week ended Feb. 9, according to Cameron Brandt, the director of research for Cambridge, Massachusetts-based EPFR Global, which tracks money flows. Outflows from gold and precious-metals funds totaled $63 million, he said.

Bets on gains in palladium rose 1.3 percent to 22,824 contracts, the highest since the CFTC data begins in 2009. On Feb. 6, prices in New York reached the highest since Sept. 6, 2011. Bullish platinum wagers grew 3.9 percent to 42,530 contracts. Aquarius Platinum Ltd., the world’s fourth-largest producer, said on Feb. 8 that it expects a global supply deficit this year.

Copper Wagers

Copper net-long positions jumped 57 percent to 22,650 contracts, the highest since Dec. 18. Global demand for the metal will climb by 4.7 percent in 2013, driven primarily by a rise in Chinese consumption, Australia & New Zealand Banking Group Ltd. analysts led by Mark Pervan said in a report Feb. 8.

A measure of net-longs for 11 U.S. farm goods jumped 15 percent to 459,806 contracts, the biggest increase since July, the CFTC data show.

Traders boosted their bullish corn position by 11 percent to 182,967 contracts, the highest since Dec. 11. Bets on cocoa gains jumped 19 percent to 18,294 contracts, the biggest increase since November.

Bullish soybean wagers surged 29 percent to 135,644 contracts, the biggest advance since March. Dry weather and shipping delays in South America are boosting demand for supplies of the oilseed from the U.S., the top grower and shipper. Exports are up 27 percent from a year earlier, driven by demand from China, the biggest buyer, U.S. Department of Agriculture data show.

“This will be a better year as the larger economies like China and the U.S. are showing signs of improvement,” said John Kinsey, who helps manage about C$1 billion ($1 billion) at Caldwell Investment Management Ltd. in Toronto. “The interest in commodities is increasing, and we expect higher prices.”