Hedge Funds Lift Bullish Bets on Growth Prospects: Commodities

Date: Monday, October 31, 2011
Author: Whitney McFerron, Bloomberg

Speculators boosted wagers on higher commodity prices by the most since August as improving prospects for growth in the U.S. and Europe sent prices toward their biggest rally in 10 months.

Money managers boosted combined net-long positions across 18 U.S. futures and options by 13 percent to 831,421 contracts in the week ended Oct. 25, Commodity Futures Trading Commission data show. The Standard & Poor’s GSCI Index of 24 raw materials has jumped 9.5 percent in October, on track for the biggest gain since December.

European leaders announced a bailout plan Oct. 27 to help relieve the region’s debt crisis, and the U.S. economy grew by a more-than-expected 2.5 percent in the third quarter. The S&P 500 Index is headed for its largest monthly advance since 1974. The outlook for demand has recovered since September, when the GSCI fell 12 percent, the biggest monthly drop since November 2008, amid concern the global economy was set for another recession.

“The big headwind that was overhanging the marketplace seems to be subsiding,” said Jeffrey Sherman, who helps manage $18 billion for DoubleLine Capital LP in Los Angeles. “Everything seems to be correlated, specifically to what’s going on in Europe, and the idea that they have a plan to make a plan.”

Greek Debt

Nineteen of 24 commodities tracked by the GSCI rose last week, led by a 15 percent surge in copper that was the biggest gain since 1988. Silver jumped 13 percent, and crude oil touched a 12-week high on Oct. 25. Coffee, hogs, sugar, gasoline and cattle fell.

The MSCI All-Country World Index of equities rose 5.6 percent last week, a fifth straight gain. Treasuries lost 0.8 percent, on a total return basis, Bank of America Corp. indexes show.

Concern that a failure by European leaders to reach an agreement on a debt plan sent the GSCI into a bear market in September, when the gauge dropped more than 20 percent from a two-year high in April. As part of the deal struck last week, bondholders will accept 50 percent writedowns on Greek debt, while the bloc’s rescue-fund capacity was boosted to 1 trillion euros ($1.4 trillion). The commodity gauge has rebounded 13 percent since touching a 10-month low on Oct. 4.

‘Under Pressure’

“Commodities have been under pressure for very big, macro reasons for the last several months, and that pressure is ending,” said Monty Guild, the founder and chief investment officer of Los Angeles-based Guild Investment Management Inc., which manages $170 million. “We think commodities are going to go much higher because this new banking situation in Europe is going to create a lot more liquidity in the world system.”

Funds poured $423 million into commodities the week ended Oct. 26, before the European bailout was announced, said Cameron Brandt, the director of research at Cambridge, Massachusetts- based EPFR Global, which tracks investment flows.

U.S. consumer confidence unexpectedly rose in October from the previous month, indicating the biggest part of the economy will keep the recovery intact. The Thomson Reuters/University of Michigan final sentiment index climbed to 60.9 from 59.4 in September, data showed on Oct. 28. The gauge was projected to drop to 58, according to the median forecast of 66 economists surveyed by Bloomberg News.

$13.35 Trillion

The value of goods and services produced in the U.S. surpassed its pre-recession level after 15 quarters. Adjusting for inflation, gross domestic product climbed to $13.35 trillion last quarter, topping the $13.33 trillion peak reached in the last three months of 2007, the Commerce Department said.

China’s manufacturing may expand in October for the first time in four months, snapping the longest contraction since 2009, after a preliminary index of purchasing managers showed a rebound in new orders and output, according to data from HSBC Holdings Plc and Markit Economics on Oct. 24.

Net-long positions in crude oil jumped 15 percent from a week earlier to 197,280 contracts, the highest since late May, according to CFTC data. Crude futures climbed 6.8 percent on the New York Mercantile Exchange last week, the most since February.

“Energy and base metals will rally, based on the fact that the economy is growing, especially one perceived to be weak like the U.S.,” DoubleLine’s Sherman said. “It’s kind of bullish for consumption globally.”

Crude Stockpiles

U.S. oil inventories dropped to the lowest level in 20 months in the week ended Oct. 14, the Energy Department said. Copper output in Chile, the world’s top producer of the metal, fell 1.9 percent in September from a year earlier, according to the country’s National Statistics Institute, while supply from Indonesia is threatened by a miners’ strike.

Copper prices may be “unimaginably” high in three years, with Chinese growth spurring consumption, Julian Zhu, a Goldman Sachs Group Inc. analyst, said in a speech at an Oct. 28 briefing in Beijing. Inventories monitored by exchanges in Shanghai, London and New York have tumbled 10 percent this month, heading for the biggest loss since May 2009.

Speculators still expect copper to keep dropping, even after paring bearish bets 39 percent to a net-short position of 5,023 contracts, the CFTC data show. The most-active Comex contract dropped 3 percent to $3.5965 per pound by 10:15 a.m. in London, 23 percent below the record $4.6575 on Feb. 15.

Eleven of 23 people surveyed by Bloomberg said copper will drop this week, eight predicted a gain, and four said prices will be little changed. The last time respondents were mostly negative, on Sept. 23, the metal slumped 4.6 percent in the following week.

Agriculture Bets

A measure of net-positions in 11 U.S. farm goods climbed for a second straight week, increasing 7.2 percent to 506,947 contracts.

Net-long positions in corn jumped 19 percent from a week earlier, the first increase in seven weeks. Speculators cut bearish holdings in wheat by 24 percent from a week earlier, and increased bullish holdings in cocoa, sugar and hogs. Investors almost doubled wagers for higher prices on coffee to 10,768 contracts, even as futures dropped 4 percent last week.

“The agriculture markets are connected to the financial markets just like everything else,” said Kelly Wiesbrock, who helps manage $1.3 billion for San Francisco-based hedge fund Harvest Capital Management. “The current inventory situation is still tight pretty much across the board, which continues to lend itself to a lot of volatility, but probably higher than historical prices going forward.”

To contact the reporter on this story: Whitney McFerron in Chicago at wmcferron1@bloomberg.net