Good article from Reuters on the commodities sell-off. Was watching BNN this morning, a repeat of Market Call from during the week, and there was a lot of talk about the seasonal nature of commodities stocks. As true as that may be, no one is going to pry my CUU shares from my fingers with the news we have coming over the next few months.
We may see some jitters on the broader market tomorrow due to lingering jitters over Greece. Why can't those damn PIGS just be dealt with already? Here's hoping Spain keeps it together...
NEW YORK |Thu May 5, 2011 6:56pm EDT
NEW YORK(Reuters) - The brutal selloff in commodity markets on Thursday had noobvious trigger, and by the same token, there was no obvious reason whyprices should not recover in the next few weeks or months.
The speed of this week'sretreat, which went into free-fall on Thursday as oil prices plunged by arecord $12, has stunned many traders. The 19-commodities CRB index .CRBfell 5 percent, a level exceeded only four times before, three of thosein the midst of the 2008 financial crisis.
"Whenyou have this kind of damage, it will take several weeks, or maybeseveral months, for people to be taken out, and for confidence to berebuilt," said Dennis Gartman, author of markets guide "The GartmanLetter".
"It's not the end of thecommodities cycle, not even close. You still have to call this acorrection. It's a sizable one and scared the heck out of everybody."
Tradersare struggling to grasp what turned sentiment so negative so quickly.Some secondary economic indicators were weak -- U.S. weekly joblessclaims rose sharply, service sector indices softened, private payrollsfor April were weak and in Germany industrial orders slumped 4 percent. But these barely moved equity markets.
TheU.S. dollar has risen sharply but that appears more related to oil'sdrop than a play on European rate policy, after the European CentralBank on Thursday sounded a little less hawkish than expected. And thenotion that the sell-off was triggered by a 25 percent slump in silver-- a market that's just a twelfth of the size of global oil futures --is laughable to many market strategists.
Certainlythey do see a herd mentality in commodities, a market that hasattracted a wide range of new investors taking advantage of the cheapmoney offered by U.S. Federal Reserve Chairman Ben Bernanke since lastAugust. Herds can be skittish, moving very suddenly and stampeding outof markets.
While the cause ofThursday's retreat remains difficult to pin down, the depth of thisweek's correction -- down 8 percent since last Friday -- isn't withoutprecedent.
In fact, the CRB indexhas three times over the past 10 months fallen by about 8 percent overthe course of two to three weeks; each time it was back to new peakswithin about a month in a remarkably similar chart pattern. (Graphic: r.reuters.com/zyf49r )
Giventhe technical carnage caused on Thursday, few traders expect such aquick recovery. But like the old adage "Sell in May and go away", theydo expect investors to come back.
"Idon't think commodities are done going up for the cycle, that is overthe next several years, but I think they may be done for the nextseveral months," said James Paulsen, chief investment strategist atMinneapolis-based Wells Capital Management, which has about $340 billionunder management.
He said the biggest damage near-term could come from monetary tightening in China,India and other major commodities consuming economies in the developingworld. Such inflation-fighting measures have incrementally dampeneddemand for raw materials over the last year, he said.
Acontinued snap back in the oversold dollar was another factor thatcould keep commodities suppressed. Until its sharp rebound on Thursday,the dollar was at three-year lows, inflating prices of most rawmaterials that trade on the greenback. The dollar jumped 1.5 percentagainst a basket of currencies .DXY on Thursday, its biggest gain sinceOctober.
What hasn't changed,however, is the fact that developing nations like China and India arestill expanding briskly, and will require ever more metal, grain andenergy from a world where producing those materials is more and morecostly.
PIMCO, which manages the $21 billion Commodity Real Return Strategy fund (PCRDX.O), the world's largest commodity mutual fund, isn't about to change its view.
MihirWohrah, told Reuters he saw "no change in the long-term secular view ofgenerally higher commodity prices" despite the brutal selloff.
OIL LEADS ROUT
Formany, the dive in prices was a compressed correction that had been longoverdue. While a host of commodities such as copper, cotton and cornhad already faded from recent peaks, oil, precious metals and otherswere still seen as frothy.
GoldmanSachs advised customers to take profits from major commodity marketsthree times in early April, saying prices had moved too far, too fast.
TheReuters-Jefferies CRB index .CRB, a global benchmark for commodities,fell almost 5 percent on Thursday for its biggest one-day loss sinceMarch 2009. For the week, the index was down 8 percent, its worst sinceDecember 2008.
The market has been fairly quick in the past to repair such damage.
InNovember and March, the CRB dropped by around 8 percent from peak totrough over the course of 7 to 8 days, but then recovered to reach newhighs almost exactly a month after the initial peak. In August, the 7.3percent decline was slower, over 15 days, and the market took a monthand a half to recover.
Silver iswidely expected to face the most difficult road to recovery, havingdived over 23 percent since the start of May after the darling oftrend-following speculators turned abruptly sour after a series ofsevere margin hikes.
Oil prices mayalso struggle to regain their footing as demand contracts in the faceof high prices and OPEC talks of raising output. U.S. futures fell below$100 a barrel for the first time in nearly two months while Brentdropped more than $10, the second-biggest one-day fall ever.
Whilemany expected energy and metals to bleed further, they had a brighterview of crops like corn and wheat, which generally lagged Thursday'sdrop.
U.S. wheat and corn futures have lost only about 6 percent of their value since the start of May.
"Thedeck (looks) richer in the agricultural market in summer months," saidHakan Kaya, manager of a $3 billion commodities portfolio at NeubergerBerman in New York.
(Additional reporting by Frank Tang, Chris Kelly, Suzanne Cosgrove, Jonathan Leff, Jennifer Ablan and K.T. Arasu; Editing by Jonathan Leff and David Gregorio)