Commodities suffered their worst rout in seven months as a steep selloff in China’s stock market magnified investor fears about weaker demand from one of the world’s largest consumers of raw materials.
The S&P GSCI, an index that tracks a diversified basket of commodities, fell 4.9% to 412.51 Monday. This was its steepest drop since November and its lowest level since April. The losses come amid a swift downdraft in Chinese stocks, which have lost more than one-quarter of their value since touching a record high in June and gave up 72% of all their gains made this year.
Commodity traders fear that China’s tumbling stocks reflect broader economic weakness. Chinese shares vaulted 60% to a record high on June 12 as Beijing unleashed a flood of cheap money in its effort to prop up indebted businesses. The government’s efforts to restructure China’s economy toward domestic consumption, and away from export-led growth, have taken a toll on economic expansion. China’s annual economic growth has slowed to 7% in the first quarter, from nearly 9% at the start of 2012, as manufacturing activity contracted and property prices fell.
Oil prices posted their steepest drop in three months. U.S. benchmark light sweet crude oil for August delivery settled down 7.7% to $52.53 a barrel on the New York Mercantile Exchange, its biggest daily drop since Feb 4 and its lowest level since April 13. The losses in oil come as inventories in the U.S. surprised higher last week and as a potential deal over Iran’s nuclear program threatens to unleash additional energy supplies on the global market, traders and analysts said.
Copper prices slumped by the most since January, with September-delivery futures closing down 3.5% at $2.5380 a pound on the Comex division of the Nymex.
Soybeans fell 1.1% to $10.33¾ a bushel, a one-week low, on the Chicago Board of Trade. Cotton prices fell 0.7% to 66.95 cents a pound, a six-session low, on the ICE Futures U.S. exchange.
“We’re getting greater signs of stress in China and typically when you see that, you see weaker economic activity” and commodity demand, said Michael Strauss, chief investment strategist with Commonfund Asset Management Co., which manages $25 billion.
Mr. Strauss has held a smaller exposure to commodities than recommended by diversified asset indexes, and said the recent downdraft in Chinese stocks reinforced his conviction that there is more trouble ahead for commodity prices, commodity producers and economies of resource-producing countries.
The drop in Chinese stocks comes amid heightened concerns about corporate profit growth and after share prices skyrocketed in response to government measures to cut borrowing costs. Many investors worry that China’s stock market is in a bubble fueled by cheap money, and that as the bubble deflates and share prices fall, the losses will trigger bankruptcies in China’s financial sector that will further sap growth.
“There will be repercussions [for commodities] given how many millions of people opened accounts and started buying stocks,” said Edward Meir, senior commodities strategist with brokerage INTL FCStone. “When your stocks account is getting crushed, you’re not going to go out and buy that washing machine…it’s all related,” he said.
Investors rushed out of commodity markets in response, cutting back holdings of energy, metals and grains.
Nicholas Robin, who helps manage $600 million invested in commodities at Columbia Threadneedle Asset Management in London, said his fund has held less copper than suggested by commodity indexes on the belief that demand would continue to disappoint.
“Metal demand is already not so good [because] the property market in China hasn’t been doing well,” Mr. Robin said, adding that recent gyrations in Chinese stocks suggest the economy there is likely to remain weak, reducing the country’s copper purchases further.
Commodity markets have been under stress for weeks as investors worried that lackluster global growth would translate into weaker appetite for resources such as crude oil and copper. Supplies of many raw materials are projected to run ahead of global demand this year, putting pressure on prices.
China’s efforts to stabilize its stock market are coming against a backdrop of a debt crisis in Greece, which is dulling the impact of the measures, said Bart Melek, senior commodities strategist with TD Securities in Toronto. Some investors are worried that credit problems in Greece will affect Europe’s economic performance, slowing the region’s growth and demand for raw materials, he said. Another concern is that demand for Chinese exports will fall further as Europe’s economy slows, he said.
“Greece, from a demand perspective, doesn’t matter, but it is impacting sentiment and risk appetite…it’s creating uncertainty and loss of risk appetite,” Mr. Melek said.
To be sure, some investors say the current pullback in commodities makes this a good time to buy resources on the cheap, and that prices should recover as global growth picks up next year.
“The demand picture will improve next year and we see further stability in China,” said Paul Christopher, global market strategist, Wells Fargo Investment institute, with $1.7 trillion in assets under management. Mr. Christopher has been telling clients to slowly add commodities back to their portfolios, after holding less of the asset class than prescribed by diversified asset indexes in recent years.
But other investors say it’s too early to return to commodity markets.
“We’re not there yet, given the challenges in Europe and the challenges that are resurfacing again in China,” said Commonfund’s Mr. Strauss.
Amazing how the dollar was finished only a few years ago. Aivars Lode
By James Ramage
The dollar firmed against the euro and the yen on Thursday, as better-than-expected data on U.S. claims for unemployment insurance fueled investor expectations for a robust May jobs report on Friday.
The dollar also gained as traders took profit from the euro’s recent rally that had been supported by a drop in German government bond prices.
The currency market also weighed comments by the International Monetary Fund recommending that the Federal Reserve delay its expected increase in short-term interest rates into 2016, until there are clearer signals of wage and price inflation in the U.S.
The dollar climbed 0.3% against the common European currency, with one euro buying $1.1242 in late-afternoon trade, on track to end a sharp two-day decline. The dollar lost 3.1% over the two previous sessions, as an improving picture of the eurozone economy and outlook for inflation led to a substantial selloff in German government bonds that extended to U.S. Treasurys and prompted a reversal in bets against the euro.
The dollar rose 0.1% against the yen to Y124.36, climbing for a second consecutive session and nearing its highest level against the Japanese currency since December 2002. The Wall Street Journal Dollar Index, which gauges the value of the dollar against a basket of 16 widely traded currencies, increased 0.3% to 86.78.
“The U.S. jobless data gave the dollar a little bit of a boost,” said Sireen Harajli, foreign exchange strategist at Mizuho Bank. “But we’re also seeing the market reacting a little after headlines from the IMF comments…It’s not anything concrete behind these moves. Nonfarm payrolls tomorrow should give the market something more definitive in the dollar’s move.”
The dollar’s recent gyrations reflect investors’ uncertainty over the extent of the U.S. economic recovery and the timing of the Fed’s first increase in interest rates in nine years. Many asset managers piled into the dollar and U.S. assets with the conviction that the Fed would raise borrowing costs in 2015, which drove the dollar to multiyear highs against the euro and the yen. Meanwhile, central banks in the eurozone and Japan have been easing policy to lift their economies and avert deflation.
But some soft U.S. data have shaken investors’ faith in America’s recovery and pushed back their expectations for higher interest rates. On Thursday, the IMF said in its annual review of the U.S. economy that the strong dollar and poor weather had sapped momentum for job creation and expansion. These negative shocks moved the fund to downgrade its growth expectations to 2.5% for the year, compared with an estimate for a 3.1% expansion in April.
The IMF’s call for the Fed to refrain from raising interest rates until the first half of 2016 resonated with some investors. IMF Managing Director Christine Lagarde sent a warning sign that this dollar rally may be reaching its expiration date, said Jonathan Lewis, chief investment officer at Samson Capital Advisors. “Many dollar bulls have bought the dollar on the view that the Fed is going to tighten soon; Lagarde is telling the Fed that tightening would be a mistake and that the dollar is overvalued,” Mr. Lewis said. “If the Fed listens to Largarde, an important argument for a strong dollar disappears.”
But starting to raise interest rates in 2015 would be appropriate, said Ugo Lancioni, currency fund manager at Neuberger Berman. “Rates have been way too low for too long,” Mr. Lancioni said. “We need to see domestic wages picking up, inflation picking up, stable growth; those need to be in place. But monetary policy in the U.S. is still very loose, and an adjustment would be justified by the improving fundamentals we’ve seen over the last few years.”
On Friday morning, the Labor Department will release its jobs numbers for May. Economists forecast the U.S. last month to have created 225,000, the unemployment rate to steady at 5.4% and for hourly wages to rise 0.2%.
The dollar picked up after initial claims for unemployment benefits declined 8,000 to a seasonally adjusted 276,000 in the week ended May 30, below economists’ expectations for 279,000 claims. “People might see the dollar at attractive levels now [and enter into long bets] ahead of the payrolls numbers, in case it’s a strong report,” said Vassili Serebriakov, currency strategist at BNP Paribas.