Commodities Post Biggest Retreat in 5 Months

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on Nov 1, 2012

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Commodities Post Biggest Retreat in 5 Months

**Commodities Lagging Behind Stocks, Bonds and the Dollar**

As the global economy grew at its slowest pace since the 2009 financial crisis, metal and energy prices decreased in October, dragging commodities to their biggest monthly loss since May, Bloomberg News reported on 1 November 2012.
The five-month low has put commodities behind stocks, bonds and the dollar. The MSCI All-Country World Index of stocks fell 0.6 per cent, including dividends, while the U.S. Dollar Index declined 0.02 per cent. According to Bank of America Merrill Lynch’s Global Broad Market Index, bonds of all types gave positive returns. Meanwhile, the Standard & Poor’s GSCI Total Return Index of 24 raw materials fell 4.1 per cent, retreating from earlier gains. The main contributors to the fall in October were coking coal, thermal coal and oil. Falls for those commodities were partly offset by higher iron ore prices although base metals also fell.

After a drastic drop in May, the S&P commodity index’s decline in October marks the second steep monthly loss in the year, leaving the gauge down 0.7 per cent for 2012. This puts commodities on track for a second consecutive annual loss for the first time since 1998.
**China’s Impact**
China, which is the world’s second largest economy, imports large quantities of raw materials, industrial metals, oil and agricultural products. As the world’s biggest user of everything from cotton to copper, China has had a significant impact on commodities, where slower growth in the country typically means lower demand for commodities. According to the Chinese government’s announcement from October 18th, the country’s economy has slowed for seven consecutive quarters, taking its toll on commodity producers and traders.

!m[Slumping Metal and Energy Prices Send Commodities to Their Biggest Monthly Loss Since May](/uploads/story/700/thumbs/pic1_inline.png)Elsewhere economic hurdles also hurt commodities. In Greece, coalition leaders continued to squabble over measures needed to clinch rescue funds, while in Spain, where unemployment climbed to a record, Prime Minister Mariano Rajoy weighed whether to apply for a full sovereign bailout.

**Investor Optimism Dims**
Commodities staged a rally during much of the third quarter of the year, lifted by announcements and anticipation of central bank easing, but since then the focus has returned to sluggish global growth and largely weak demand for commodities.
Recently, investor optimism dimmed as the International Monetary Fund cut its global growth forecast and the Federal Reserve said strains on the world economy present “significant downside risks.” China reported continuing slowdown, while services and manufacturing in the Eurozone last month contracted more than economists forecast.

“The markets realised that slow growth is still a concern around the world,” Michael Cuggino, who manages about $17 billion at San Francisco-based Pacific Heights Asset Management, told Bloomberg News.
**Q4 Forecast**
According to traders and analysts, the fourth quarter of the year is likely to see commodities markets hit by more uncertainty ahead of a potential US “fiscal cliff” that could send the world’s largest economy into a recession and as new leadership takes over in top raw materials consumer China.
“It’s unlikely that you’re going to get much more central bank action before the end of this year. And while there’s some expectation in the markets of policy announcements out of China by the new leadership, I’d be surprised if something does materialise,” Wiktor Bielski, global head of commodities research at VTB Capital in London, told Reuters.