Stimulus to Reverse Commodity Bull-to-Bear Fastest Since 2008

By Asjylyn Loder - Sep 12, 2012 7:17 AM GMT+0800

Commodities surged from a bear to a bull market in anticipation of economic stimulus measures from the Federal Reserve, completing the fastest turnaround since the depths of the financial crisis starting in 2008.
Within 11 weeks the Standard & Poor’s GSCI spot index rose 22 percent from its 2012 low, stoked by falling supplies of oil and grains and speculation that the European Union will successfully end its sovereign debt crisis. The gauge of 24 raw materials soared to a record high four years ago before plunging as the U.S. slid into the deepest recession since the 1930s.

After the jobless rate stayed at more than 8 percent for 43 months, traders are speculating that Fed Chairman Ben S. Bernanke will unveil a third round of so-called quantitative easing as soon as this week. Corn prices advanced to an all-time high last month after the worst U.S. drought since 1956 and oil is climbing amid mounting tension over Iran’s nuclear program.
“There have been a lot of moving parts within the commodities markets this year,” Jim Paulsen, chief investment strategist in Minneapolis at Wells Capital Management, which oversees $320 billion, said in a telephone interview. “We are turning a corner. The surprise is going to be that global growth is going to accelerate.”

Commodities Rising

The S&P GSCI Agriculture Index rose 33 percent after dipping to a 2012 low on June 15, and the S&P GSCI Energy Index advanced 25 percent from its bottom for the year on June 21. Oil rebounded 25 percent to $97.17 a barrel from a 2012 low on the New York Mercantile Exchange on June 28, and corn surged 54 percent to $7.7775 a bushel since June 15 on the Chicago Board of Trade. Energy and agriculture together make up more than 85 percent of the S&P GSCI.
West Texas Intermediate crude futures, the U.S. benchmark, will average $94 a barrel in the fourth quarter, according to the median of 23 analyst estimates compiled by Bloomberg. Corn will cost $7.19, according to the median of eight forecasts.

In 2008, the S&P GSCI climbed 46 percent from January to an all-time high July 3. Oil advanced to an intraday record $147.27 that month and corn surged as much as 75 percent in the first half of that year to intraday peak of $7.9925. The index then plunged to a four-year low on Feb. 18, 2009, as the credit crisis worsened following the September collapse of Lehman Brothers Holdings Inc. Within a month, the gauge had rebounded 21 percent.
“Commodities spent from October 2007 until July 2008 climbing up,” Jeff Currie, head of commodities research for Goldman Sachs Group Inc. in New York, said by phone. “When you think of the run-up this year, it happened in three weeks in February. And the run-down happened in five weeks in May and June.”

Jackson Hole

The market boomed after Bernanke signaled the central bank’s last round of quantitative easing, known as QE2, in an Aug. 27, 2010, speech to the Federal Reserve Bank of Kansas City’s annual economic symposium in Jackson Hole, Wyoming. His remarks and the subsequent Nov. 3, 2010 unveiling of a $600 billion plan to buy Treasuries spurred an eight-month rally in commodities, with the S&P GSCI advancing 51 percent by April 8, 2011, to 760.33.
At the same meeting last month he said he wouldn’t rule out steps to lower a jobless rate he described as a “grave concern.” Market expectations for additional central bank stimulus rose to 99 percent in August, the highest ever, according to Citigroup Inc.

ECB Action

The Fed’s efforts have coincided with those of the European Central Bank, which is struggling to contain a sovereign debt crisis that has tipped six euro-region countries, including Spain, Italy and Greece, into recessions. The S&P GSCI jumped 5.6 percent on June 29 after the EU unveiled a 120 billion-euro aid plan.

ECB President Mario Draghi said on Sept. 6 that policy makers agreed to an unlimited debt-purchase program to curb borrowing costs and fight speculation of a currency breakup.
A deterioration of the global economy may erode demand, stifling the rally. The Organization of Petroleum Exporting Countries said yesterday that world oil consumption growth will decline to 800,000 barrels a day in 2013, from 900,000 a day this year.

“Downside risk exists as the economic slowdown in the developed countries could increasingly spill over” into emerging economies, the group’s Vienna-based secretariat said.
Iron ore prices fell to $86.70 a so-called dry ton on Sept. 5, the lowest since October 2009, as demand from China slowed. The world’s second largest economy and biggest user of the steel-making ingredient expanded 7.6 percent in the second quarter, the slowest pace in three years, the National Bureau of Statistics said July 13.

‘Underlying Demand’

“Without any stimulus I don’t think that underlying demand is very strong,”Nic Johnson, a money manager who helps oversee about $30 billion in commodities at Pacific Investment Management Co. in Newport Beach, California, said by phone. “I don’t see the case for a rally from a sustained organic improvement in global growth.”
Prices have been lifted as forecasts of supply have ebbed. Corn surged to an intraday record $8.49 a bushel on Aug. 10 after scorching heat forced the U.S. Department of Agriculture to cut harvest expectations. The department had predicted a record crop on June 12.
Soybeans have advanced 47 percent to $17.015 a bushel from this year’s low on Jan. 13. The price touched an intraday record of $17.89 on Sept. 4. Wheat has jumped 49 percent to $8.8375 a bushel from a 2012 bottom on Jan. 18.

Iranian Embargo

Oil climbed to $97.17 after a European Union embargo on Iranian crude went into force on July 1, raising concern that the Islamic republic will try to close the Strait of Hormuz, the transit point for almost 20 percent of the world’s crude. Iran’s exports fell 23 percent this year through August, according to data compiled by Bloomberg.

Natural gas rose as Hurricane Isaac roared toward the U.S. Gulf Coast last month. The region is home to 7 percent of the fuel’s production, according to the Energy Department. At its peak on Aug. 30, the storm shut in 73 percent of output, according to the Bureau of Safety and Environmental Enforcement. Futures increased 57 percent to $2.992 per million British thermal units from a decade-low on April 19.
Gasoline has gained 19 percent to $3.0435 a gallon on the Nymex since falling to a 2012 low on June 21. Retail prices advanced to $3.843 a gallon on Sept. 10, the highest since April 23, according to Heathrow, Florida-based AAA, the largest U.S. motoring organization.

“Commodity prices are poised for a good second half,” Harry Tchilinguirian, BNP Paribas SA’s head of commodity-markets strategy in London, said by phone. “After the risk-off correction in the first half of this year, global monetary policy easing alongside individual supply constraints provide a positive outlook for commodities.”

To contact the reporter on this story: Asjylyn Loder in New York at aloder@bloomberg.net.
To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net.