Hedge funds take wrong-way positions for a fourth week

March 26 (Bloomberg) -- Hedge funds wagered the wrong way on commodity prices for a fourth consecutive week, boosting bullish holdings just before reports showing a contraction in manufacturing from China to Europe drove prices lower.

Money managers lifted net-long positions in 18 U.S. futures and options by 2.9% to 1.17 million contracts in the week ended March 20, Commodity Futures Trading Commission data show. The Standard & Poor’s GSCI Spot Index of 24 raw materials dropped 1% last week, led by declines in lead and corn. Orange juice tumbled 11%, the most since August.

The S&P GSCI fell to a three-week low on March 22 after reports showed factory output in Germany and France shrank in March and a measure of China’s manufacturing was the weakest since November. U.S. government data the next day showed new home purchases unexpectedly fell last month, increasing investor concerns about the durability of the world’s largest economy.

“There are headwinds to growth right now, and therefore there are headwinds to commodities,” said Walter ‘Bucky’ Hellwig, who helps manage $17 billion of assets at BB&T Wealth Management in Birmingham, Alabama.

The MSCI All-Country World Index of shares fell 1.1% last week, with about $607 million erased from the value of global equities, according to data compiled by Bloomberg. The dollar retreated 0.6% against a basket of six major trading partners, and Treasuries returned 0.4%, a Bank of America Corp. index shows.

Corn, Coffee

Eighteen of the 24 raw materials tracked by S&P fell last week. Corn tumbled 3.9%, the most since mid-January, as improving U.S. weather boosted the outlook for crops. Arabica coffee declined to the lowest since October 2010 on March 22 on signs of expanding output from Brazil, the world’s top grower. The GSCI rose as much as 0.5% today.

A preliminary reading in a Chinese purchasing managers’ index from HSBC Holdings Plc and Markit Economics dropped to 48.1 this month. Readings below 50 signal contraction. A gauge of euro-region manufacturing fell to 47.7 in March from 49 in February, Markit said March 22.

China’s steel output is slowing as the economy focuses more on consumers than large infrastructure projects, Ian Ashby, president of iron ore at BHP Billiton Ltd., the biggest mining company, said March 20. Rio Tinto Group, the second-biggest iron-ore exporter, also sees a slowdown in China, David Joyce, the London-based company’s managing director of expansion projects, told a conference in Perth, Australia the same day.

‘Petrified’ Speculators

“The general concern of a slowdown in China has petrified market speculators,” Chad Morganlander, a Florham Park, New Jersey-based money manager at Stifel Nicolaus & Co., which oversees more than $115 billion in assets. “A deceleration in demand from major economies like China will continue to be a thematic concern for investors.”

Forecasting moves in commodity markets has become more difficult as price swings have increased, said Peter Sorrentino, a fund manager who helps oversee $14.5 billion at Huntington Asset Advisors in Cincinnati. The 15-day historical volatility on the S&P GSCI was near the highest in two months last week, data compiled by Bloomberg show.

Demand for some raw materials may rebound as China’s government adds to stimulus measures to shore up growth, Morgan Stanley analysts led by New York-based Hussein Allidina said in a March 18 report.

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