Hedge funds cut bullish commodity bets by the most in a month as the Federal Reserve warned the U.S. budget impasse may damage the economy, increasing concern about demand just as prices head for the first loss since 2008.
Speculators and money managers decreased net-long positions across 18 U.S. futures and options by 11 percent to 802,817 contracts in the week ended Dec. 11, U.S. Commodity Futures Trading Commission data show. Sugar holdings tumbled 68 percent, the most in five years, and those for wheat dropped to the lowest since June. Wagers on higher crude-oil prices tumbled 21 percent, the most since May.
The Standard & Poor’s GSCI Spot Index of 24 raw materials retreated 4.3 percent this quarter, with U.S. lawmakers in a stalemate on how to avoid about $600 billion in tax increases and spending cuts that start next month. The Fed “doesn’t have the tools” to counter the risks to the economy should there be no deal, Chairman Ben S. Bernanke said Dec. 12.
“The fact that the Fed is saying that there’s only so much they can do spooked people,” said John Stephenson, who oversees about $2.74 billion at First Asset Investment Management Inc. in Toronto. “They basically admitted that they don’t have what it takes to deal with the fiscal cliff, and it took the shine off the idea that unlimited money printing will help commodities.”
The S&P GSCI climbed 0.7 percent last week, paring its loss this year to 1.2 percent. The MSCI All-Country World Index of equities climbed 0.6 percent, and the dollar dropped 1 percent against a basket of six major trading partners. Treasuries lost 0.3 percent, a Bank of America Corp. index shows.
The Fed lowered its outlook for economic growth next year to 2.3 percent to 3 percent on Dec. 12, from 2.5 percent to 3 percent in September. Global growth will slow to “near stall speed” in 2013 as monetary policy becomes less effective in stimulating expansion, Saumil Parikh, a fund manager at Pacific Investment Management Co., said in a Dec. 11 report.
U.S. retail sales rose less than forecast in November, climbing 0.3 percent, Commerce Department figures showed Dec. 13. Economists projected a gain of 0.5 percent, according to the median of 81 forecasts in a Bloomberg survey. Confidence among small businesses plunged last month to the lowest since March 2010, the National Federation of Independent Business’s optimism index showed Dec. 11.
Rising consumption in China and emerging economies will help support commodities demand, said Kevin Caron, a Florham Park, New Jersey-based market strategist at Stifel Nicolaus & Co., which oversees about $130 billion in assets.
Chinese manufacturing may expand at a faster pace this month, according to the preliminary reading for a purchasing managers’ index released Dec. 14 by HSBC Holdings Plc and Markit Economics. The country is biggest consumer of everything from cotton to zinc and the U.S. is the top user of oil and corn.
Gold, copper, silver, platinum and palladium will outperform other commodities next year as central bank stimulus programs boost demand from investors seeking alternative assets, Bank of America said in a report Dec. 11.
The Fed said last week it will boost its main stimulus tool by adding $45 billion of monthly Treasury purchases to an existing pledge of $40 billion in mortgage debt a month. The program is its third round of bond buying that has helped spur an 83 percent gain in the S&P GSCI since 2008.
“Central-bank efforts to stoke inflation are a positive, and we’re seeing a modest pickup in overall activity, so on balance we’re constructive on the outlook for commodities for next year,” Caron said.
Money managers pulled $147 million from commodity funds in the week ended Dec. 12, said Cameron Brandt, the director of research for Cambridge, Massachusetts-based EPFR Global, which tracks money flows. Gold and precious-metals funds outflows totaled $136 million, he said.
Investors cut bullish wagers on crude oil to 101,871 contracts, the lowest in a month. In the week ending Dec. 7, stockpiles at Cushing, Oklahoma, America’s biggest storage hub, climbed 2.6 percent from a week earlier to 46.8 million barrels, the highest in more than five months. The funds increased bets on lower natural-gas prices by 14 percent to 49,582 contracts, the most bearish since June.
Gold holdings gained 3 percent to 129,865 contracts, the fourth increase in five weeks. Prices have fallen for three straight weeks, and Goldman Sachs Group Inc. said Dec. 5 the metal will peak next year after 12 annual gains. Gold was down 0.3 percent at $1,691.13 an ounce by 11:39 a.m. in London.
A measure of net-longs for 11 U.S. farm goods was 9.6 percent lower at 484,088 contracts, the CFTC data show.
Funds cut their sugar holdings to 6,056 contracts, the lowest since a net-short position in November 2007. Prices in New York reached a 28-month low on Dec. 13. Supplies will outpace demand by 10.975 million metric tons in the 12 months that started Oct. 1, the biggest surplus in five years, according to Kingsman SA, owned by McGraw-Hill Cos.
Bullish wheat bets dropped 67 percent to 11,219 contracts, the biggest decline since June. The U.S. Department of Agriculture boosted its forecast for global inventories for a second straight month on Dec. 11. Thirteen analysts surveyed by Bloomberg said they expect prices to gain this week, 10 were bearish and one was neutral. That’s the lowest proportion of bulls since Nov. 16.
“We’ve got the budget negotiations, and they seem to be breaking down, and the apparent ineffectiveness of the stimulus to juice the market overrides the bullishness we’ve seen from some of the economic numbers,” said Walter ‘Bucky’ Hellwig, who helps manage $17 billion of assets at BB&T Wealth Management in Birmingham, Alabama. “A lot of investors are reluctant to take on normal asset-risk.”