Fed stimulus fading as forecasters say best is over

London : The biggest advances in commodities this year may be over because of mounting concern that policy makers aren’t doing enough to bolster economic growth at a time when producers are expanding supply.

The Standard & Poor’s GSCI gauge of 24 raw materials will end the year at 677, 3.6 per cent higher than now, based on the median of 10 investor and analyst estimates compiled by Bloomberg. The index is about 3 per cent lower since the European Central Bank announced an unlimited bond-purchase programme on September 6 and 5 per cent below its level when the Federal Reserve pledged a third round of debt-buying September 13.

That contrasts with a 92 per cent surge from the end of 2008 through June 2011 as the Fed bought $2.3 trillion of debt in two bouts of quantitative easing. The impact will probably be smaller this time, Barclays Plc says. Prices are already in a bull market, the 17-nation euro area is contracting and China has slowed for six straight quarters. Europe and China represent about 60 percent of global copper demand and about 33 percent of crude-oil consumption.

The S&P GSCI rose 1.3 per cent this year, heading for a fourth consecutive annual advance. Soybeans and wheat led the gains after the worst US drought since 1956. The MSCI All- Country World Index of equities jumped 13 percent and the US Dollar Index, a measure against six major trading partners, dropped 1.1 per cent. Treasuries returned 1.6 per cent, a Bank of America Corp. index shows.

Commodity assets under management reached $406 billion at the end of July, from $399 billion at the start of the year, based on Barclays’ estimates of money tied to exchange-traded products, medium-term notes and indexes. Assets reached a record $451 billion in April 2011. Open interest, or contracts outstanding, across the members of the S&P GSCI rose 16 percent this year, data compiled by Bloomberg show.

While the Paris-based International Energy Agency anticipates record demand for oil in 2013, it said in a monthly report Sept. 12 that inventories have become “more comfortable.” Natural-gas futures tumbled 27 per cent in the past year in New York as production in the US, the biggest producer and consumer, advanced to a record.

“We view owning commodities and gold in particular as more attractive post the QE3 announcement,” said Walter “Bucky” Hellwig, who helps manage $17 billion at BB&T Wealth Management in Birmingham, Alabama. “While the QE is there, it does keep the bid under commodities prices and gives them an opportunity to continue to move higher even with a sluggish economy.”

Central-bank action should boost prices across precious and industrial metals, JPMorgan said in a report Sept. 14, citing a probable decline in the dollar. Gold, silver, Brent crude oil and aluminum will probably rally more than other commodities, Standard Bank said in a September 17 report.

The Fed will buy $40 billion of mortgage debt a month and hold the benchmark interest rate near zero through at least mid-2015. The ECB held its benchmark rate at a record low of 0.75 per cent and said its program will target government bonds with maturities of one to three years. The Bank of Japan unexpectedly expanded its asset-purchase fund by 10 trillion yen ($126 billion) on September 19. More than two-dozen nations cut market interest rates this year, data compiled by Bloomberg show.

Commodities also may rally because of supply cuts. Morgan Stanley expects copper demand to outpace supply for a fourth year in 2013. The US Department of Agriculture is forecasting the smallest global corn stockpiles in six years and the lowest soybean inventories in two decades after drought across the US and Europe parched crops. Sanctions against Iran are crimping oil exports from what was once the second-biggest producer in the Organization of Petroleum Exporting Countries.

“This is not as much as a one-way ticket as it has been in the previous two instances,” said Sean Corrigan, the chief investment strategist at Diapason Commodities Management SA in Lausanne, Switzerland, which has about $7 billion invested in commodities. “The tug of war is between how much is already priced in and how much poorer is the underlying commodity demand because the world economy is in a much worse condition now.”

China, the biggest consumer of everything from coal to cotton to copper, set an annual growth target of 7.5 per cent in March. It cut interest rates for the second time in less than a month in July and lowered reserve requirements three times between November and May. The government approved plans this month for a $158 billion subways-to-roads construction plan.

Equities and high-yield debt probably will give greater returns than commodities, said Ashish Misra, the head of investment strategy at Lloyds TSB Banking Group in London. Its private banking unit manages about £11 billion ($18 billion) of assets. Commodities have risen about fourfold since the end of 2001, during which the MSCI All-Country World Index gained 41 per cent and Treasuries returned 77 per cent.

“We’re heading for a period of underperformance in commodities after years of outperformance,” Misra said. “The effects of a slowdown in China and resumption of normal production trends in agriculture after this year’s drought- driven supply shocks should continue to pressure commodity prices downward.”