Hedge funds cut positions to six-month low before rally

Debt Limit

Investors’ concern that Republicans and Democrats will be unable resolve their differences over the U.S. budget may limit gains for commodities, said Peter Jankovskis, who helps oversee $3 billion of assets as co-chief investment officer at Lisle, Illinois-based Oakbrook Investments.

The U.S. reached its $16.4 trillion borrowing limit on Dec. 31, and the Treasury Department is using what it terms “extraordinary” measures to finance the government. House Speaker John Boehner, an Ohio Republican, has said that any increase in the limit should be accompanied by a dollar-for-dollar cut in new government spending. President Barack Obama said it’s the responsibility of Congress to raise the debt ceiling and he won’t negotiate with Republicans, as he did in 2011.

China Inflation

China’s inflation accelerated more than forecast to 2.5% in December, the highest in seven months, the National Bureau of Statistics said on Jan. 11. The jump in consumer costs increased concern that officials may curb programs aimed at spurring growth.

“There is a big question on the horizon about what sort of cuts may be put in place by the U.S. government,” Jankovskis said. “China’s inflation will always be a factor the leaders will consider when they determine the stimulus measures.”

China, the largest oil-consuming country after the U.S., accounted for 11% of global demand in 2011, according to BP Plc’s Statistical Review of World Energy. The Asian nation, with a population of 1.34 billion, uses about 40% of the world’s copper, Barclays Plc estimates.

Money managers pulled a net $263 million from commodity funds in the week ended Jan. 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 $1.07 billion, he said.

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