Bullish Wagers Plunge Most in 2012 on Greek Impasse: Commodities

Speculators cut bets on a rally in commodities by the most since November as Greece’s struggle to form a new government and weaker-than-expected industrial output in China erased this year’s gains in raw materials.

Money managers reduced net-long positions across 18 U.S. futures and options by 19 percent to 723,239 contracts in the week ended May 8, the biggest decline since Nov. 22, Commodity Futures Trading Commission data show. The Standard & Poor’s GSCI Spot Index of 24 raw materials dropped 6.5 percent in eight sessions, the longest slide since December 2008.

The euro plunged to a three-month low on May 11 after inconclusive May 6 elections left Greece at a political impasse, threatening the implementation of austerity pledges and reigniting concerns that the country will have to leave the currency union. More than $1 trillion was wiped from the value of global equities last week as JPMorgan Chase & Co. reported a $2 billion trading loss, adding to speculation that global growth will falter and company earnings will slow.

“The market isn’t believing the global growth story,” said Jeffrey Sherman, who helps manage about $30 billion of assets for DoubleLine Capital in Los Angeles. “You have this struggle in Europe, and most economists are forecasting a recession, and that’s dominating headlines.”

The S&P GSCI slumped 1.7 percent last week, touching 640.46 on May 11, the lowest since Dec. 22. The gauge is now down 0.4 percent for the year. The MSCI All-Country World Index of equities dropped 2.1 percent, and the dollar rose 1 percent against a basket of six major currencies. Treasuries returned 0.3 percent, a Bank of America Corp. index shows.

Cotton Tumbles
Eighteen of the materials tracked by the S&P GSCI declined last week. Losses were led by corn, which plunged 6.3 percent, the most since mid-January. Cotton tumbled to a 21-month low on May 11 after a U.S. government report showed global inventories will climb. Gold and silver retreated to four-month lows.

Gross domestic product in the euro area will drop 0.3 percent this year, the European Commission forecast May 11. Greece will have the deepest contraction, with GDP shrinking 4.7 percent. Fifty-seven percent of investors said at least one country will abandon the euro by year-end, according to the Bloomberg Global Poll published May 10.

Industrial Output
China’s industrial output expanded 9.3 percent in April, the slowest pace since 2009 and missing analysts’ forecasts for growth of 12.2 percent, government data showed May 11. Production at Indian factories, utilities and mines unexpectedly declined 3.5 percent from a year earlier, the Central Statistical Office said May 11. The median of 32 estimates in a Bloomberg survey was for a 1.7 percent gain.

Commodities may rebound because producers of raw materials are unable to keep up with increasing demand, said Adrian Day, the president of Adrian Day Asset Management in Annapolis, Maryland, who oversees about $170 million of assets.

Palladium supply will lag behind demand through at least 2016, UBS AG said on May 11. Barclays Plc is forecasting shortages in copper and tin this year. U.S. soybean stockpiles at the end of August 2013 will be 31 percent lower than a year earlier, the U.S. Department of Agriculture said May 10.

“Commodities remain a good longer-term investment given the backdrop of a dovish central bank and continued unexpected supply disruptions,” Mihir Worah, who manages Pacific Investment Management Co.’s $22 billion Commodity Real Return Strategy Fund from Newport Beach, California, said in an e-mail.

Money Flows
Investors pulled $815 million from commodity funds in the week ended May 9, according to data from Cambridge, Massachusetts-based EPFR Global, which tracks money flows. That’s the biggest outflow this year, said Cameron Brandt, the director of research for EPFR. Gold and precious-metals funds lost $467 million.

Gold is now just 1.1 percent higher this year at $1,584 an ounce in New York after erasing most of its gains. The metal will rally to $1,840 in the next six months because it remains the “currency of last resort,” Goldman Sachs Group Inc.’s commodity analysts said in a May 9 report.

Bullish gold bets plunged 20 percent to 92,498 contracts, the lowest since December 2008, CFTC data show. Wagers on a silver rally tumbled 32 percent to 7,159, the biggest decline since late December. Gold prices dropped 3.7 percent last week, the most in two months, as the dollar rose, curbing demand for the precious metal as an alternative investment. Silver declined 5.1 percent to $28.89 an ounce.

Fortress Shutters
Fortress Investment Group LLC (FIG), the first publicly traded private-equity and hedge fund manager in the U.S., said it will liquidate its $500 million commodities fund run by William Callanan after losing almost 13 percent in the past four months.

Fortress is the third commodities hedge fund to shutter in the past six weeks. Billionaire trader John Arnold said in a letter obtained by Bloomberg on May 2 that he plans to close the Centaurus Energy Master Fund in Houston, and Pierre Andurand, who co-runs BlueGold Capital Management LLP, a $1 billion fund in London, said last month that client money will be returned.

A measure of net-longs for 11 U.S. farm goods fell 15 percent to 435,801 contracts, the CFTC said. That’s the lowest since January. Investors increased their net-short position in wheat, or bets on a price decline, to 46,187 contracts from 25,027 a week earlier. The grain declined 2.1 percent last week as favorable weather boosted the prospect for crops.

Money managers boosted their net-short position in cotton more than fivefold to 7,306 contracts, the CFTC data show. Prices tumbled 10 percent last week, the most since July, and reached a 21-month low on May 11.

Raw Materials
World stockpiles will climb 10 percent in the season that starts Aug. 1, the USDA said May 10. Cotton imports into China may tumble 35 percent from the current season to 14 million bales, the agency said.

“There’s a slowdown in China, so there’s been a glut of several essential raw materials,” said Chad Morganlander, a Florham Park, New Jersey-based money manager at Stifel Nicolaus & Co., which oversees more than $115 billion of assets. “Couple that with an increased amount of political uncertainty as well as economic uncertainty in Europe, and that leads speculators to de-risk their portfolios.”