Was it all just a bad dream? Signs on Monday that commodities prices are at least stabilising amid positive economic news from the US, China and Europe might come as a relief markets after last week’s rout wiped a whopping $99bn off the overall market value of commodities prices, according to Bloomberg – except, that is, for those who investors now nursing some very burned fingers…
From Bloomberg on Monday:
Commodities rallied, rebounding from the biggest weekly slump since 2008, and Asian stocks gained as concerns over the strength of the global recovery eased. The euro rose on prospects the region’s debt crisis won’t keep the European Central Bank from increasing interest rates further.
The Standard & Poor’s GSCI Index of 24 raw materials jumped 1.3 percent as of 12:40 p.m. in Tokyo after an 11 percent slump last week. Oil and silver futures rose for the first time in five days, and lead rallied 2 percent. The euro appreciated 0.6 percent to $1.4402, and Australia’s dollar and the won also gained. Treasuries fell, snapping a seven-day winning streak. The MSCI Asia Pacific Index advanced 0.4 percent and futures on the S&P 500 Index increased 0.5 percent.
Last week’s commodities rout knocked off $99 billion of market value, driving out speculators and prompting Goldman Sachs Group Inc. to predict a possible recovery. Data last week showed U.S. payrolls increased by more than economists had forecast, and separate reports this week may show China’s inflation eased last month while industrial production and retail sales grew at about the same pace as the previous month.
All too little, too late for some of the big commodities-focused hedge funds and ETFs which, as we noted on Friday, are known to have racked up huge losses in just over 24 hours last week.
More has emerged about the biggest losers on Monday, in the FT’s report that Clive Capital, the world’s biggest commodities hedge fund, sustained losses of more than $400m as a result of the plunge in oil prices last week.
In a letter to investors on Friday, Clive said it was down 8.9 per cent on the week after what it called Thursday’s “extraordinary” price movements, according to the FT’s report. Clive’s management said it was at a loss to explain what had caused crude oil markets to be “annihilated”.
London-based Clive – which manages an estimated $5bn of client money – is among the largest of several big hedge funds believed to have been hit by the unexpected commodities sell-off. Others, including Astenbeck Capital, the Phibro-owned fund run by Andrew Hall, are thought to have taken double-digit percentage point losses to their portfolios, adds the FT, citing investors in the funds.
The report concludes that the scale of the losses “demonstrates that even the savviest investors in commodities were wrongfooted by the correction, one of the sharpest one-day falls on record”.
ZeroHedge, however, takes a different view, remarking on Monday:
…When a trade has enough momentum, and has been working long enough, even the quote unquote “savviest investors” become a momo chasing herd, with nobody hedging, and a massive drop in prices always likely to be the deathknell for some previously vaunted investor, whose only claim to fame was being lucky enough once to be at the right time and the right place, and to put a huge levered bet that worked out. And praying that he or she can recreate those conditions.
The good news for Clive’s investors is that despite the massive hit, the fund is only slightly down on the year — an indication, says the FT, of its strong performance over the four months to April. More encouragingly, at least for investors, Clive and other asset managers remain bullish and expect commodity prices to resume their rise.
All very well the funds which like Clive, are “on the border of TBTF” (too big to fail), says ZeroHedge, noting that “many other, smaller energy funds were not quite as lucky when the barrage of margin calls flooded their back offices on Wednesday through Friday”.
As for what really drove the commodities rout. As the FT noted in a weekend editorial comment:
Predicting short-term swings in commodity prices is… a fool’s game (if no doubt one for which many fools are handsomely paid). Given the flood of investors’ funds into commodities during the boom, and the growing use of commodities as collateral to finance speculation, last week’s slide probably just means that a self-inflated bubble self-deflated a little, in accordance with its own internal mass-psychological dynamics. Put simply, investors took fright.
Indeed, as FT Alphaville ventured on Friday, perhaps it was simply “time for a sell-off”.
Related links:
Some more standard deviations in commodities - FT
Deutsche chimes in on the commodities rout – FT Alphaville
Commodities VaRy extreme right now - FT Alphaville
Oh no! It’s pre-QE2 all over again! - Commodities Reporter