Investors cut wagers on a rally for commodities to the lowest in almost four years and pulled a record $4.23 billion from funds last week as prices erased this year’s gain on a slowdown for manufacturing in China.
Hedge funds and other large speculators reduced net-long positions across 18 U.S. futures and options in the week ended Feb. 26 by 16% to 447,106 contracts, the lowest since March 2009, U.S. Commodity Futures Trading Commission data show. Investors are betting on a decline in copper prices for the first time since November, and reduced their crude-oil holdings by the most in 11 weeks.
Manufacturing in China, the top consumer of cotton, copper and soybeans, expanded at the weakest pace in five months in February, the government said March 1. In Europe, which accounts for 18% of global copper use and 14% for energy, unemployment climbed to a record in January. The International Monetary Fund said Feb. 28 that spending cuts will erode growth in the U.S., the world’s biggest economy.
“Commodity markets are worried about China and are sensing possible trouble in the macro picture,” said Stanley Crouch, who helps oversee $2 billion of assets as chief investment officer at New York-based Aegis Capital Corp. “Commodities may be out in front of a possible slowdown. The sentiment is changing to cautious.”
The Standard & Poor’s GSCI Spot gauge of 24 commodities is down 0.6% this year. The MSCI All-Country World Index of equities climbed 3.9%, while the dollar rose 3.2% against a basket of six trading partners. Treasuries lost 0.2%, a Bank of America Corp. index shows.
Record Outflows
Money managers removed a record $4.23 billion from commodity funds in the week ended Feb. 27, including $4.03 billion from gold and precious-metals funds, said Cameron Brandt, the director of research for Cambridge, Massachusetts- based researcher EPFR Global, which tracks money flows. That’s the highest of data going back to 2000.
China’s official Purchasing Managers’ Index was 50.1 in February, down from 50.4 a month earlier and less than the forecast of 50.5 in a Bloomberg survey of 31 analysts. Readings above 50 indicate expansion. Steel reinforcement-bar futures fell 1.8% in Shanghai last month, the first drop since November, and iron-ore prices tumbled to a four-week low March 1. Almost half of China’s provinces have set lower targets for growth this year than in 2012, Nomura Holdings Inc. estimates.
Europe Unemployment
Unemployment in the 17-nation euro area rose to 11.9% in January, the highest since the data series started in 1995, figures from the European Union’s statistics office showed. Brent crude oil, the U.K. benchmark, tumbled to a seven- week low on March 1, and an index tracking six London Metal Exchange commodities including copper and aluminum dropped 4.8% in February, the most since October.
The International Monetary Fund said it will lower its growth forecast for the U.S. this year because of $85 billion in spending cuts that were set to begin last week. The U.S. is the top user of crude oil and the second-biggest metals consumer.
Raw materials from cocoa and hogs to zinc and crude oil are slumping in 2013 after a four-year commodity rally led to records prices for everything from copper and gold to cattle and corn. Investors boosted purchases as central banks cut interest rates and began asset purchases to revive growth after the after the 2008 financial crisis, and crop-damaging droughts cut grain output.
Commodity Investments
Commodity assets under management reached a record $451 billion in April, compared with $154 billion at the end of 2008, and the investments have been above $400 billion for seven straight months, and totaled $430 billion in January, according to Barclays Plc.
Precious metals got a boost from concern that record-low interest rates and surging government debt in the U.S. and Europe would spur inflation. Gold held by exchange-traded funds reached a record 2,632.5 metric tons on Dec. 20. Since then, holdings have plunged 4.9%, and the drop in February was the biggest since April 2008. Open interest in commodities is down 2.5% since reaching the highest since at least 2006 on Feb. 19.
Stimulus policies from central banks and an improving economic outlook in the U.S. will help buoy commodities, said James Paulsen, the Minneapolis-based chief investment strategist at Wells Capital Management, which oversees about $325 billion of assets.
Bernanke Testimony
Federal Reserve Chairman Ben S. Bernanke said in Congressional testimony last week that monetary easing is helping to improve demand for housing and cars as he signaled that the Fed is prepared to keep buying bonds at its present pace of $85 billion a month. European Central Bank President Mario Draghi said Feb. 27 the bank is “far” from considering an exit from its stimulus measures.
American factories expanded in February at the fastest pace in almost two years, an industry group said March 1. Personal spending rose in January even as incomes dropped by the most in 20 years, a report from the Commerce Department showed the same day. Goldman Sachs Group Inc. said March 1 that the drop in copper prices was an opportunity to buy because Chinese imports will pick up in the next three to six months.
“We’re optimistic regarding the U.S. economy,” said Chad Morganlander, a Florham Park, New Jersey-based fund manager at Stifel Nicolaus & Co. which oversees about $130 billion of assets. “Our bet is that there will slowly be a reacceleration in global growth the second half of the year.”
Gold Prices
Bets on higher gold prices gained 28% to 54,180 contracts, the most since August, the CFTC data show. The holdings are still down 47% this year. Those for silver tumbled 31% to 11,652 contracts in the week to Feb. 26, the lowest since August, and platinum wagers dropped 18% to 33,642 contracts, the biggest drop since May.
Gold futures in New York dropped 5% in February, the fifth straight monthly loss and the longest slump since 1997. The cycle for gold prices, which climbed for 12 straight years, has probably turned, Goldman Sachs analysts wrote in a Feb. 25 report. The bank cut its three-month target to $1,615 an ounce from $1,825 and lowered the six- and 12-month forecasts.
Crude-oil wagers slid 16% to 175,211 contracts, while those on gasoline declined 2.9% to 87,914, the first loss in six weeks. Money managers are holding a copper net-short position, or bets on a decline, of 7,172 contracts. That compares with a net-long holding of 11,413 contracts a week earlier and is the most-bearish outlook since August.
Agriculture Slump
A measure of speculative positions across 11 agricultural products from wheat to coffee to cattle fell 24% to 145,564, the lowest since March 2009.
Investors decreased their net-long position in hogs by 56% to 9,688 contracts, the lowest since September. Bullish wagers on corn fell 20% to 52,075, the lowest since June. Net-long positions in soybeans fell for a third straight week.
Celeres, an Uberlandia, Brazil-based research company, said the soybean harvest in the South American nation was 28% complete as of Feb. 25. Output may reach a record 83.5 million metric tons as the country overtakes the U.S. as the world’s biggest exporter, the U.S. Department of Agriculture has said.
“The expectations for commodities had probably gotten a little bit big, and the market needed a positive catalyst to keep things going, and we haven’t gotten that,” said Anthony Valeri, a market strategist with LPL Financial Corp. in San Diego, which oversees $350 billion. “In agriculture, the bad weather that would produce supply shortages hasn’t materialized, so it’s tough to find a compelling case.”
