Commodities Erase 2012 Gain on Global Economic Woes

Wednesday, 24 October 2012
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Published in United States Economy

Commodities declined, erasing this year’s advance, on speculation that demand for energy, industrial metals and some agricultural products will slump because of the sluggish global economy.

The Standard & Poor’s GSCI Spot Index (MXWD) of 24 raw materials fell 1.4 percent to settle at 639.3 at 4 p.m. New York time. Earlier, the gauge touched 635.1, the lowest since Aug. 3. The measure also erased 2012 gains in May and July. The last annual drop was in 2008.

The International Monetary Fund cut its 2012 global-growth forecast to 3.3 percent on Oct. 9 from a July prediction of 3.5 percent and said the euro area will contract 0.4 percent. The economy in China, the biggest user of everything from copper to cotton, has slowed for seven straight quarters.


“The commodity complex is very sensitive to the demand destruction that is happening because of the global slowdown,” said Stanley Crouch, who helps oversee $2 billion of assets as chief investment officer at New York-based Aegis Capital Corp. “We are due for a big sell-off in the risk assets, and so commodities will not do well as the macro concerns remain.”

Cotton futures fell the most in 10 weeks, and crude oil dropped to the lowest since mid-July. Gasoline declined for the ninth straight session, the longest slump since at least October 2005. Copper dropped to the lowest since Sept. 7.

European leaders have struggled to contain the region’s debt crisis that prompted Greece, Ireland and Portugal to get bailouts.
‘Collateral Damage’

“People are still worried about demand from Europe and the collateral damage from Europe itself,” said Dan Denbow, a portfolio manager of the $2.1 billion USAA Precious Metals & Minerals Fund in San Antonio. “If Europe continues to slide and if it slides further into recession, does that tip the Chinese soft landing into something worse and therefore hurts commodity demand even more?”

Spain’s economy contracted for a fifth quarter, adding pressure on Premier Mariano Rajoy to seek more European aid. Chinese factories are losing pricing power in the worst wholesale-cost deflation since 2009, signaling company earnings may deteriorate further.

“For a while, global growth is off the table,” said John Stephenson, who helps manage $2.7 billion at First Asset Investment Management Inc. in Toronto. “You’ve got Europe clearly in the middle of a crisis. Commodities go lower and investors should adopt the fetal position.”
Stocks, Bonds

The MSCI All-Country World Index of equities has gained 9.8 percent this year. Treasuries returned 1.5 percent, a Bank of America Corp. index shows, and the dollar declined 0.3 percent against a basket of major currencies.

Coffee, cotton and sugar have posted the biggest declines among GSCI components this year. Wheat in Chicago has gained the most, while corn and soybeans have reached record highs this year, as the most-severe U.S. Midwest drought in five decades scorched crops.

Hedge funds reduced net-long positions across 18 U.S. commodities futures and options by 4.4 percent to 1.18 million contracts in the week ended Oct. 16, the lowest since July 24, government data showed on Oct. 19.

“The problem we have ultimately is that it’s hard to find where the growth story comes from,” Jeffrey Sherman, who helps manage more than $45 billion of assets for DoubleLine Capital in Los Angeles, said in a telephone interview. “What you’re having is a retracement of risk markets.”

The GSCI index gained 6.8 percent in the first quarter, tumbled 13 percent in the second and jumped 11 percent in the third. The gauge posted an annual decline only twice since 1999.

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