Welcome to CanadianHedgeWatch.com
Saturday, December 4, 2021

Hedge Funds Cut Bets Most Since ’08 as Prices Slump: Commodities

Date: Wednesday, April 10, 2013
Author: Debarati Roy, Bloomberg

Hedge funds reduced bets on a commodity rally by the most since 2008 as rising supplies of everything from copper to sugar and slowing U.S. growth drove prices to the biggest slump in six months.

Speculators cut net-long positions across 18 U.S. futures and options by 31 percent to 468,780 contracts in the week ended April 2, the most since October 2008, U.S. Commodity Futures Trading Commission data show. Investors are betting on a decline in silver for the first time and have record bearish positions in copper and sugar. Corn wagers dropped the most since June 2010, leading the biggest ever decline in agricultural holdings.

Silver, rubber and corn entered bear markets last week, joining declines in raw materials from coffee to wheat, on signs that production will outpace demand. Photographer: Simon Dawson/Bloomberg

April 8 (Bloomberg) -- Neville Power, chief executive officer of Fortescue Metals Group Ltd., talks about Australia and China's deal to allow direct trading between the yuan and Australian dollar, and its implications for the commodity market. Power also discusses the outlook for iron ore demand and prices. He speaks with Zeb Eckert on Bloomberg Television's "On the Move" from the BOAO Forum for Asia in Hainan, China. (Source: Bloomberg)

Silver, rubber and corn entered bear markets last week, joining declines in raw materials from coffee to wheat, on signs that production will outpace demand. The commodities supercycle, or longer-than-average period of rising prices, has ended and returns are unlikely to match the performance of the past decade, UBS AG said April 2. U.S. employers hired the fewest workers in nine months in March, and the jobless rate in the 17- nation euro area rose to a record.

“There has been a gradual buildup in supplies, and that is especially challenging because slowdown concerns are growing,” said Rob Haworth, a senior investment strategist in Seattle at U.S. Bank Wealth Management, which oversees about $110 billion of assets. “We’re awash in supplies, so I see prices remaining under pressure until the growth issue gets resolved.”

GSCI Slump

The Standard & Poor’s GSCI Spot Index of 24 raw materials slumped 4.1 percent last week, the most since September. The MSCI All-Country World Index of equities fell 1.3 percent, while the dollar slid 0.6 percent against a basket of six trading partners. Treasuries returned 1 percent, a Bank of America Corp. index shows. The GSCI index rose 0.3 percent today to 631.06 at 12:46 p.m. New York time.

Standard Chartered Plc and Barclays Plc raised their forecasts for this year’s copper surplus last week. Supplies will also outpace demand for aluminum, lead, nickel and zinc this year, Barclays Plc said April 4. U.S. crude-oil stockpiles reached the highest in more than 22 years in the week ended March 29, a government report showed April 3.

Payrolls in the U.S. grew by 88,000 workers last month, less than the most-pessimistic forecast in a Bloomberg survey, the Labor Department said April 5. American services industries, which account for almost 90 percent of the economy, expanded in March at the slowest pace in seven months, a private report showed April 3. The U.S. is the top consumer of corn and crude oil and the second-biggest metals user.

Worst Start

The GSCI gauge will be at 644 at the end of June, 2.2 percent higher than now, according to the median of nine investor and analyst predictions compiled by Bloomberg. The index has dropped 2.6 percent this year, the worst start since 2003, with 19 of the 24 raw materials dropping. Investors are holding net-short positions in seven of the 18 commodities tracked in the CFTC data.

Slowing economies will mean increased global stimulus measures, boosting prospects for a commodity rebound, said Quincy Krosby, a market strategist for Newark, New Jersey-based Prudential Financial Inc., which oversees more than $1 trillion of assets.


European Central Bank President Mario Draghi said April 4 that policy makers “stand ready to act” and the Bank of Japan (8301) said last week it will double the monetary base by the end of 2014 through purchases of government bonds, its biggest-ever round of asset purchases. The Federal Reserve said March 20 that it will continue with $85 billion in monthly bond buying.

The Fed, the ECB and the BOJ have more than doubled the combined size of their balance sheets since the global financial crisis erupted in 2007, expanding them by a total of $4.7 trillion. The programs helped revive economies and sent the GSCI up 85 percent from the end of 2008 through 2012.

“The accommodative policy in the U.S. will continue,” Krosby said. “With more stimulus in Europe and Japan, we will see the commodities basket gain traction.”

Contracts outstanding across the members of the S&P GSCI jumped 11 percent this year to 13.37 million, the highest since the data begins in January 2006. Money managers boosted bullish positions by 67 percent in the previous three weeks, the biggest such advance since May 2009, on signs the U.S. was accelerating.

‘Excess Optimism’

“There had been some excess optimism, and now with signs of cooling, we are seeing some concerns emerge,” said Alan Gayle, a senior strategist at RidgeWorth Capital Management, which oversees about $48 billion. “People will be looking at every number that comes out of the U.S. very carefully.”

Fund managers withdrew $1.19 billion from commodity funds in the week ended April 3, Cameron Brandt, the director of research for Cambridge, Massachusetts-based EPFR Global, which tracks money flows, said in an e-mail. Outflows from gold funds totaled $930 million.

Investors are holding a silver net-short position of 2,982 contracts, the CFTC data show. That compares with a long position of 632 a week earlier and is the first bet on a decline since the data begins in 2006. Bullish gold wagers tumbled 22 percent to 47,164, the lowest in three weeks.

Copper Bears

The copper net-short holding increased to 38,951 futures and options, the most since at least 2006 and compares with 30,036 a week earlier. Supplies of the metal will outpace demand by 97,000 metric tons this year, up from a March forecast of 92,000 tons, Barclays said in an April 4 report.

A measure of speculative positions across 11 agricultural products plunged 67 percent to 101,646 contracts, the biggest cut since the data begins in 2006.

The Standard & Poor’s Agriculture Index of eight commodities declined 21 percent from a closing peak on July 20, including a 24 percent slump in wheat, which entered a bear market in early January. Soybeans, down 22 percent from a closing high in September, first reached a bear market in November. Coffee and sugar also are in bear markets.

U.S. corn, wheat and soybean inventories before the 2013 harvests probably will be larger than the government forecast last month, according to a survey of as many as 35 analysts by Bloomberg. The Department of Agriculture will update its crop outlook on April 10. Farmers will plant the most corn this year since 1936, the USDA forecasts.

“Supplies are rising at a time when fundamentals are already weak,” said John Toohey, a San Antonio, Texas-based vice president of equity investments at USAA Investments, which manages about $55 billion of assets. “The structural problems in Europe remain and signs of slowdown in the U.S. do not augur well for commodities.”