Following a long run-up, commodities last week suffered their largest declines in almost two years, paring this year's gains to about 10%.
The falloff came on speculation that economic growth will slow as central banks seek to cool inflation by raising borrowing costs.
On May 5, the Standard & Poor's GSCI Index of 24 raw materials fell 6.9% to 681.28, the biggest drop since June 22, 2009.The gauge had retreated for four days, the longest losing streak since mid-March.
Silver, crude oil and heating oil led the declines.
European Central Bank President Jean-Claude Trichet said last Thursday that the bank will monitor inflation risks “very closely,” suggesting that it may wait until after next month to raise interest rates again. The ECB raised interest rates April 7, joining China, India, Poland and Sweden in seeking to control inflation.
COST OF LIVING
The cost of living in the United States rose at its fastest pace since December 2009 for the one-year period through March, the same month that Chinese consumer prices rose by the most since 2008.
“This could be one of the most severe corrections that we've seen over the last year,” said Sean Corrigan, chief investment strategist at Diapason Commodities Management SA.
“If things get really bad, we could possibly retrace half of the rally of the past six to nine months,” said Mr. Corrigan, whose firm has about $9 billion invested in commodities.
The slump in raw materials came as Glencore International AG sold shares in an initial public offering at a price that values the Swiss commodities trader at about $61 billion.
The
Goldman Sachs Group Inc., in reports April 11 and 15, told investors that they should be underweight commodities in the next three to six months. The bank still expects commodities to advance about 10% over the next 12 months.
Crude oil and Brent oil both fell by over 8% a barrel Thursday. Gasoline prices declined about 6.7% to $3.10 a gallon on the New York Mercantile Exchange, and natural gas fell about 6.5% for a million British thermal units.
“The market is clearly vulnerable,” Mr. Corrigan said, adding that West Texas Intermediate crude may decline to $100 a barrel, and copper may drop to $8,000 a ton, if selling picks up.
“Gold would be the least of your worries. It's going to be the industrial cyclical commodities; it's going to be the coppers and the tins and the crudes that get hit the worst,” Mr. Corrigan said.
Following employment data in the United States last week, China will report its trade balance, inflation and industrial production numbers this week.
“There is a lot of data coming out, and the expectations are that it's going to be fairly bearish. So there is some risk off the table across commodities,” said Walter de Wet, head of commodities research at Standard Bank PLC. Copper for delivery in three months fell 3.3% a metric ton Thursday on the London Metal Exchange. Aluminum, nickel, zinc, tin and lead also retreated.
Gold for immediate delivery declined about 2.7% an ounce, while platinum dropped about 3.1%.
SILVER FUTURES
Silver futures traded on the Comex exchange extended a decline into a
bear market after CME Group Ltd. raised margin requirements by 84% over less than two weeks.
In agricultural markets, cocoa for July delivery slid about 4.9% a ton on ICE Futures. U.S. Arabica coffee per pound declined about 2.1%.
Per bushel, raw sugar slumped about 2.3%, wheat declined about 1.8%, corn retreated about 2.6% and soybeans fell about 2.4%.
Funds were still bullish on commodities at the end of last month, given that the S&P GSCI Total Return Index had beaten bonds, stocks and the dollar every month since December, the longest stretch in at least 14 years. By April 26, managed-money funds held a net 1.49 million futures and options contracts in 18 commodities, 57% more than a year earlier, according to
Commodity Futures Trading Commission data compiled by Bloomberg.
INDEX'S STRONG RUN
The S&P GSCI Total Return Index of 24 commodities climbed 4.4% last month, after reaching the highest level since October 2008. The MSCI All-Country World Index of equities advanced 3.9%, the most since December, and the U.S. Dollar Index, a gauge against six counterparts, fell 3.9%, touching a 33-month low.
Bonds of all types returned 0.9% on average, based on
Bank of America Merrill Lynch's Global Broad Market Index.
Fed Chairman Ben S. Bernanke signaled that he will keep pumping record amounts of money into the world's largest economy and reiterated a pledge first made two years ago to keep interest rates “exceptionally low.” The U.S. economy will expand 3.2% this quarter, from 1.8% in the first quarter, and will accelerate through the end of the year, according to the median of 73 economists' estimates compiled by Bloomberg.
“We're in a risk-on mode being helped by Bernanke,” said Arjuna Mahendran, the head of investment strategy for Asia at
HSBC Private Bank, part of Europe's largest bank by market value. The stimulus means “big walls of money going into commodities, stocks and emerging markets,” he said.
The S&P GSCI Total Return Index rallied for an eighth month, the longest winning streak since 2004, when growth in the U.S. economy drove demand for raw materials. Silver, coffee, cocoa and gasoline led the gains in percentage terms last month.
High commodities prices have yet to crimp demand as inventories are tight, and getting out now would be “premature,” Hussein Allidina, the head of commodities research at Morgan Stanley, said April 29.
Morgan Stanley, operator of the world's largest brokerage firm, is still “very long” crude and corn, and favors wheat and gold, he said.
“Things are down 5% all the time,” said Jim Rogers, the chairman of Rogers Holdings. “This is normal.”
