Commodities are surging from a bear to a bull market in the fastest turnaround since the depths of the financial crisis four years ago as traders await economic stimulus measures from central banks.
Within 11 weeks the Standard & Poor’s GSCI spot index rose 22 per cent from its 2012 low, stoked by falling supplies of oil and grains and speculation that the Federal Reserve will prop up US growth while the European Union ends its sovereign debt crisis. The gauge of 24 raw materials soared to a record high four years ago before plunging as the US slid into the deepest recession since the 1930s.
After the jobless rate stayed at more than eight per cent 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 are about an all-time high after the worst US drought since 1956 and oil is rising 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 per cent after dipping to a 2012 low on June 15, and the S&P GSCI Energy Index advanced 25 per cent from its bottom on June 21. Oil rebounded 25 per cent to $97.01 a barrel on Thursday on the New York Mercantile Exchange from its low for the year on June 28, and corn surged 52 per cent to $7.695 a bushel since June 15 at the Chicago Board of Trade. Energy and agriculture together make up more than 85 per cent 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 per cent 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 per cent in the first half of that year to intraday peak of $7.9925. The index then plunged to a four-year low on February 18, 2009, as the credit crisis worsened following the September collapse of Lehman Brothers Holdings Inc. Within a month, the gauge had rebounded 21 per cent.
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“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 August 27, 2010, speech to the Federal Reserve Bank of Kansas City’s annual economic symposium in Jackson Hole, Wyoming. His remarks and the subsequent November 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 per cent 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 per cent in August, the highest ever, according to Citigroup Inc.
The Fed’s efforts have coincided with those of the European Central Bank, which is struggling with the sovereign debt crisis that has tipped six euro-region countries into recessions. The S&P GSCI jumped 5.6 per cent on June 29 after the EU unveiled a 120 billion-euro aid plan.
ECB President Mario Draghi said on September 6 that policy makers agreed to an unlimited debt-purchase program to curb borrowing costs and fight speculation of a currency breakup.
Eroding Demand
Deteriorating global growth 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 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 per cent in the second quarter, the slowest pace in three years, the National Bureau of Statistics said July 13.
“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.”
Corn Harvest
Prices have been lifted as supply forecasts have ebbed. Corn surged to a record $8.49 a bushel on Aug. 10 after scorched fields forced the U.S. Department of Agriculture to cut harvest expectations. The department had predicted a record planting on June 12.
Soybeans have advanced 51 per cent to $17.4575 a bushel from this year’s low on Jan. 13. The price touched a record $17.89 on Sept. 4. Wheat has jumped 50 per cent to $8.90 a bushel from a 2012 bottom on Jan. 18.
Oil has increased as 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 per cent of the world’s crude. Iran’s exports fell 23 per cent this year through August, according to data compiled by Bloomberg.
Hurricane Isaac
Natural gas rose as Hurricane Isaac roared toward the U.S. Gulf Coast last month. The region is home to 7 per cent of the fuel’s production, according to the Energy Department. At its peak on Aug. 30, the storm shut in 73 per cent of output, according to the Bureau of Safety and Environmental Enforcement. Futures increased 61 per cent to $3.063 per million British thermal units from a decade-low on April 19.
Gasoline has gained 18 per cent to $3.0016 a gallon on the Nymex since falling to a 2012 low on June 21. Retail prices advanced to $3.858 a gallon yesterday, the highest since April 22, 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.”