London, 22 October 2011

Ahead of what may be a momentous week for financial markets, commodity investors are expecting the worst, according to Barclays Capital. Investor selling of commodities has intensified in recent weeks and hedge funds have been particularly aggressive. Gross short positions across the major US commodity futures markets are now 30% larger than they were at the start of September and net hedge fund length has halved.

Institutional investors have also been unusually active in cutting positions. "The September outflow of almost $10bn is the largest in our monthly series (which dates from the start of 2009) and double the total net outflow that occurred across the whole of Q3 2008 in the run-up to the first financial crisis," according to Kevin Norrish and his research team at BarCap.

"Metals markets, both base and precious, have borne the brunt of the selling and are among the largest price losers in the past month. But despite the lack of resolution in Europe, the macro-economic situation elsewhere has brightened considerably.

"Evidence is mounting that the US is emerging from its soft patch and recent data supports the view that China is heading for a soft landing. This contrast between bearish sentiment, but positive macro-economic and fundamental trends in many commodities suggests that if the financial market gloom does clear, a swift rebound in most commodity prices is likely, followed by the re-emergence of more constructive medium-term price trends in those markets with supportive fundamentals."

Bellwether copper could benefit most from an improvement in the financial market outlook as prices are trading a long way below fair value, say BarCap. They also continue to favour crude oil, corn and aluminium as commodities with the most constructive medium-term fundamentals, while gold looks set to benefit from the renewed concerns over inflation and currency debasement that any cure for Europe’s ills will inevitably fuel.

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Commodities Now