Bar­clays warns com­modi­ties may slump on a ‘rush for ex­its’

The Pak Banker - - MARKETS/SPORTS -

Com­modi­ties in­clud­ing oil and cop­per are at risk of steep de­clines as re­cent ad­vances aren't fully grounded in im­proved fun­da­men­tals, ac­cord­ing to Bar­clays Plc, which warned that prices may tum­ble as in­vestors rush for the ex­its.

Cop­per may slump to the low $4,000s a met­ric ton, from $4,945 in Lon­don last week, while oil could fall back to the low $30s a bar­rel, an­a­lyst Kevin Nor­rish said in a note. The risk for raw ma­te­ri­als is that in­vestors seek to liq­ui­date bets on gains quickly and in uni­son, with po­ten­tially highly neg­a­tive con­se­quences, Nor­rish wrote in the note en­ti­tled "Buf­falo Jump," a term that de­scribes a cliff where Na­tive Amer­i­cans herded bi­son to their death.

"In­vestors have been at­tracted to com­modi­ties as one of the best per­form­ing as­sets so far in 2016," he said in the March 28 re­port. "How­ever, in the ab­sence of any con­certed fun­da­men­tal im­prove­ments, those re­turns are un­likely to be re­peated in the sec­ond quar­ter, mak­ing com­modi­ties vul­ner­a­ble to a wave of in­vestor liq­ui­da­tion."

Com­modi­ties re­bounded from a more than 25-year low in Jan­uary amid spec­u­la­tion that prices may now be bot­tom­ing af­ter they lost 11 per­cent in the fi­nal three months of 2015 and 14 per­cent in the third quar­ter. Oil and cop­per have re­cov­ered from the multi-year lows seen in the Jan­uary and Fe­bru­ary, and Bar­clays es­ti­mated net flows into com­mod­ity prod­ucts to­taled more than $20 bil­lion in the two-month pe­riod in the strong­est start to a year since 2011.

"Given that re­cent price ap­pre­ci­a­tion does not seem to be very well founded in im­prov­ing fun­da­men­tals, and that up­ward trends may prove dif­fi­cult to sus­tain, the risk is grow­ing that any set­back will re­sult in a rush for the ex­its that could again lead com­mod­ity prices to over­shoot to the down­side," he said.

In­vestors were in­creas­ingly tak­ing short­term bets on raw ma­te­ri­als, not the long-term buy-and-hold strat­egy for di­ver­si­fi­ca­tion and in­fla­tion pro­tec­tion that un­der­pinned in­flows in the pre­vi­ous decade, he said. In ad­di­tion, as com­modi­ties are among the few as­sets that have risen in the first quar­ter, that may make in­vestors keener than usual to close out bets on gains, he said.

"Key com­modi­ties mar­kets such as oil and cop­per al­ready face over­hangs of ex­cess pro­duc­tion ca­pac­ity and in­ven­to­ries, but also now face an­other ob­sta­cle in the re­cov­ery process, that of po­si­tion­ing, which is now ap­proach­ing bullish ex­tremes," Nor­rish said.

Net-long hold­ings in cop­per climbed this month to 27,862 con­tracts, the highest since May, and were at 23,011 in the week ended March 22, ac­cord­ing to data from the Com­mod­ity Futures Trad­ing Com­mis­sion. In oil, the net-long po­si­tion ad­vanced to 235,830, the highest since June, af­ter money mangers cut bear­ish bets to a nine-month low.

Cop­per for de­liv­ery in three months fell as much as 0.9 per­cent to $4,901 on the Lon­don Metal Ex­change on Tues­day, when mar­kets re­opened af­ter a two-day break. West Texas In­ter­me­di­ate traded at $38.82, and Brent was at $39.72.

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