Hedge Funds Bullish Raw-Material Bets Jump Most in Two Months: Commodities

Hedge funds increased bullish bets on commodities by the most since August on mounting optimism the global economy will avoid another recession, boosting prospects for raw-materials demand.

Money managers raised combined net-long positions across 18 U.S. futures and options by 12 percent to 737,647 contracts in the week ended Oct. 18, Commodity Futures Trading Commission data show. Wagers increased most in energy and agriculture, led by heating oil, gasoline, coffee and soybeans.

The Standard & Poor’s GSCI gauge of 24 commodities climbed 7.1 percent in October, on track for the biggest monthly advance this year, as European leaders moved closer to resolving the region’s debt crisis. Reports last week showed U.S. housing starts jumped to the highest since April 2010 and manufacturing unexpectedly accelerated, increasing investor confidence that the world’s largest economy isn’t tipping back into recession.

“People are looking around saying, ‘You know what, the world isn’t ending’,” said John Stephenson, a senior vice president and fund manager at First Asset Investment Management Inc. in Toronto, which manages $2.7 billion of assets. “It’s time to buy some commodities.”

The S&P GSCI index tumbled 12 percent in September, the biggest loss since the financial slump of 2008, as Europe’s debt crisis, a more than doubling in U.S. unemployment in four years and weaker growth in Chinese manufacturing threatened to erode demand for commodities. Prices rebounded on signs that supplies of metals, energy and agricultural products are still falling short of demand.
Stocks Rally

Stocks gained around the world last week as European finance ministers began a six-day negotiation aimed at preventing a Greek default and shielding banks. The MSCI All- Country World Index climbed 0.4 percent, capping a fourth weekly advance, the longest rally since January. The U.S. Dollar Index, a measure against six trading partners, fell 0.3 percent for a second weekly retreat. A weaker U.S. currency cuts the cost of dollar-denominated commodities for those holding other monies.

The Federal Reserve Bank of Philadelphia’s general economic index climbed to 8.7 from minus 17.5 in September, the biggest one-month rebound in 31 years, data released Oct. 20 showed. Readings greater than zero indicate expansion in the area covering eastern Pennsylvania, southern New Jersey and Delaware. U.S. housing starts jumped 15 percent last month to a 658,000 annual rate, the Commerce Department reported Oct. 19.
‘Return to Risk’

“The reason that commodities are going to come back: the emerging world growing, and the U.S. growing,” said James Paulsen, the chief investment strategist at Minneapolis-based Wells Capital Management, which oversees about $350 billion of assets. “Like stocks, you’re seeing somewhat of a return to risk in general, and certainly commodities are going to be a part of that play.”

Economic growth is likely to be “noticeably stronger” in the second half of the year, Federal Reserve Vice Chairman Janet Yellen said in a speech in Denver on Oct. 21. The U.S. expanded at a 1.3 percent annual pace in the second quarter, compared with 0.4 percent in the first three months, Commerce Department data show. Analysts surveyed by Bloomberg this month projected 2 percent growth in the third quarter.

Crude oil jumped 11 percent in New York trading since the start of October, heading for the biggest monthly gain since September 2010. Speculators increased bullish bets by 8.7 percent to 171,378 contracts, a second consecutive weekly expansion, CFTC data show.
Crude, Copper Inventories

U.S. crude inventories fell 4.73 million barrels to 332.9 million in the week ended Oct. 14, the lowest since February 2010, the Energy Department reported Oct. 19.

Corn futures are up 11 percent on the Chicago Board of Trade this month, rebounding from a 23 percent plunge in September, the worst loss in records going back to 1959. Global production will fall short of demand for a second consecutive year in 2012, the U.S. Department of Agriculture estimates.

Agricultural commodities are “primed for a bounce” because prices no longer reflect the balance between supply and consumption, Rabobank said in a report last week. Corn, the biggest U.S. crop with a value of $66.7 billion last year, has the most to gain, the banks’ analysts said.

Speculators increased bullish bets in agricultural commodities by 11 percent in the week ended Oct. 18, the first increase since August. Net-long positions in coffee jumped 37 percent to 5,429 contracts, the biggest advance since Aug. 30, CFTC data show.
Coffee Rises

Arabica-coffee prices climbed the most since January 2009 on Oct. 21 in trading on ICE Futures U.S. in New York, bringing the gain in the past year to 22 percent. Inventories in warehouses monitored by the bourse have dropped to the lowest in more than 11 years.

Bullish bets on soybeans jumped 33 percent, the first increase in seven weeks, CFTC data show. Soybean futures slumped every day last week on the Chicago Board of Trade, the longest losing streak in a month.

Speculators still expect copper prices to keep dropping, even after paring their bearish bets by 13 percent to a net- short position of 8,294 contracts, the CFTC data show. Futures fell 5.4 percent last week on the Comex exchange in New York, paring advances in the previous two weeks. Copper stockpiles monitored by bourses in London, New York and Shanghai have contracted for three consecutive weeks, a sign demand is strengthening.

The S&P GSCI gauge is still 17 percent below this year’s peak in April, and the combined net-long position has tumbled 53 percent from a record in October last year. Commodity assets under management tumbled almost $10 billion to $393 billion in September, the most since at least the beginning of 2009, Barclays Capital said in a report Oct. 21.
‘Jittery’ Markets

The slump reflected “jittery market sentiment and investors’ rather fickle mood,” Suki Cooper, an analyst for the bank in New York, wrote in the report. The “contrast between bearish sentiment, but positive macro-economic and fundamental trends in many commodities, suggests that if the financial market gloom does clear, a swift rebound in most commodity prices is likely.”

Investors pulled $404 million from commodity sector funds in the week ending Oct. 19, according to EPFR Global, a Cambridge, Massachusetts-based researcher. Gold and precious metals had inflows of $221 million.

Speculators cut their net-long position in gold by 3 percent to 127,689 contracts, the CFTC data show. Futures declined 2.8 percent to $1,636.10 an ounce last week on the Comex bourse. Holdings in exchange-traded products backed by the metal advanced 0.2 percent to 2,222.4 metric tons, data compiled by Bloomberg show.

Traders “have been more focused on risk-on, risk-off,” said Nelson Louie, the global head of commodities at New York- based Credit Suisse Asset Management who helps manage $11.4 billion in commodity-related assets. “As we get past this environment, market participants will focus on fundamental drivers of supply and demand for raw materials.”