Commodities Drop Most in Seven Weeks on Signals Economic Growth Is Easing

Commodities dropped the most in seven weeks, paring this year’s gains to 13 percent, on speculation that economic growth will slow as central banks seek to cool inflation by raising borrowing costs.

The Standard & Poor’s GSCI Index of 24 raw materials fell as much as 3.1 percent to 708.87, the biggest drop since March 15, and was at 711.89 as of 2:31 p.m. in London. The gauge has retreated for four days, the longest losing streak since mid- March. Lead, cocoa, silver, cotton and Brent crude led the declines.

The European Central Bank President Jean-Claude Trichet said today the bank will monitor inflation risks “very closely,” suggesting it may wait until after June to raise interest rates again. The ECB raised interest rates on April 7, joining China, India, Poland and Sweden in seeking to control inflation. The cost of living in the U.S. rose at its fastest pace since December 2009 in the 12 months ended in March, the same month in which 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,” Sean Corrigan, chief investment strategist at Diapason Commodities Management SA, which has about $9 billion invested in commodities, said by phone from Lausanne, Switzerland. “If things get really bad, we could possibly retrace half of the rally of the past six to nine months.”

The slump in raw materials comes as Glencore International AG sells shares in an initial public offering which may value the Baar, Switzerland-based commodity trader at about $61 billion. Goldman Sachs Group Inc. in reports on April 11 and 15 told investors they should be “underweight” commodities in the next three to six months. The bank still expects commodities to advance about 10 percent over the next 12 months.

Crude oil fell 3.4 percent to $105.52 a barrel in New York trading, while Brent oil retreated 3.4 percent to $117.13 a barrel in London. Gasoline declined 2.7 percent to $3.2322 a gallon on the New York Mercantile Exchange and natural gas fell 1.2 percent to $4.522 for a million British thermal units.

“The market is clearly vulnerable,” 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.”
Nonfarm Payrolls

The U.S. government may say tomorrow nonfarm payrolls increased 185,000 in April after gaining 216,000 the previous month, according to the median forecast of 84 economists surveyed by Bloomberg. The number of claims for U.S. unemployment benefits unexpectedly rose last week, the Labor Department said today. China will report its trade balance, inflation and industrial production numbers next week.

“People are concerned what the data are going to show in the next seven days with regards to monetary policy,” said Walter de Wet, head of commodities research at Standard Bank Plc in London. “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.”

Copper for delivery in three months fell 3.3 percent to $8,824.50 a metric ton on the London Metal Exchange. Aluminum, nickel, zinc, tin and lead also retreated. Gold for immediate delivery declined 0.8 percent to $1,504.88 an ounce while platinum dropped 1.3 percent to $1,799.75 an ounce.
Silver Futures

Silver futures traded on the Comex exchange extended a decline into a bear market to trade at $37.465 an ounce after CME Group Ltd. raised margin requirements by 84 percent in less than two weeks. The metal may fall to $34 an ounce by the end of the week, Standard Bank’s De Wet said.

In agricultural markets, cocoa for July delivery slid 4.6 percent to $3,062 a ton on ICE Futures U.S. in New York. Arabica coffee declined 1.9 percent to $2.89 a pound. Raw sugar slumped 2.5 percent to 20.82 cents a pound. Wheat declined 0.7 percent to $7.67 a bushel, corn retreated 1 percent to $7.225 a bushel and soybeans fell 0.8 percent to $13.41 a bushel.

Funds were still bullish commodities at the end of April, after the S&P GSCI Total Return Index beat bonds, stocks and the dollar every month since December, the longest in at least 14 years. Managed-money funds held a net 1.49 million futures and options in 18 commodities by April 26, 57 percent more than a year earlier, according to U.S. Commodity Futures Trading Commission data compiled by Bloomberg.

High commodity prices have yet to crimp demand as inventories are tight, and getting out now would be “premature,” Hussein Allidina, the head of commodity research at Morgan Stanley in New York, said on April 29. Morgan Stanley, operator of the world’s largest brokerage, is still “very long” crude and corn, and favors wheat and gold, Allidina said in an April 29 telephone interview.