Commodities routed, raising fears of 'severe' correction

Commodities plunged the most since 2008, stocks worldwide posted the biggest three-day drop since March and the dollar rallied after American jobless claims unexpectedly rose and the European Central Bank signaled it will wait until after June to raise interest rates. The Standard & Poor's GSCI index of 24 commodities sank 7.3 percent at 3:19 p.m. in New York and has lost 11 percent this week. Silver tumbled 11 percent, extending its decline since April 29 to 28 percent. Oil sank 9.7 percent, falling below $100 a barrel for the first time since March 17. The MSCI All-Country World Index of shares in 45 nations fell 1.4 percent. The dollar gained 2.2 percent against the euro, making commodities quoted in the greenback more expensive for holders of other currencies. “This could be one of the most severe corrections that we've seen over the last year,” Sean Corrigan, chief investment strategist at Diapason Commodities Management SA, which has about $9 billion invested in commodities, said by phone from Lausanne, Switzerland. “If things get really bad, we could possibly retrace half of the rally of the past six to nine months.” U.S. claims for employment benefits jumped to 474,000 last week amid auto-plant shutdowns, exceeding the median economist estimate of 410,000 in a Bloomberg survey, while worker productivity declined. The euro weakened after ECB President Jean-Claude Trichet surprised some investors who expected a quicker move to fight surging inflation. “Both equities and commodities had a big run,” said Mike Ryan, the New York-based chief investment strategist for Wealth Management Americas at UBS Financial Services Inc., which oversees $741 billion. Following the U.S. jobs report, “anyone wanting to take some profits now has an excuse to do it.” The S&P measure of commodities prices had surged 20 percent in 2011 through April 29. The MSCI stock gauge closed at the highest level since June 2008 on May 2 after rallying 8.2 percent since Dec. 31 following first-quarter earnings that beat estimates from 57 percent of its companies that posted results since April 11. In addition to the employment data, a separate report today showed the productivity of U.S. workers slowed in the first quarter and labor costs rose as a growing economy prompted companies to boost employment. The Bloomberg Consumer Comfort Index dropped to minus 46.2, the lowest level in more than a month, as rising fuel costs squeezed American household budgets. The U.S. government may say tomorrow nonfarm payrolls increased 185,000 in April after gaining 216,000 the previous month, according to the median forecast of 84 economists surveyed by Bloomberg. “The economic outlook is looking more challenging,” said Jason Brady, a managing director at Thornburg Investment Management in Santa Fe, New Mexico, which oversees about $84 billion in assets. “People have been crowding into stocks and commodities, but with the additional slowdown in the U.S. and the more difficult employment situation, there's suddenly more uncertainty.” In agricultural markets, cocoa for July delivery slid 4.9 percent to $3,055 a ton on ICE Futures U.S. in New York. Arabica coffee declined 2.1 percent to $2.8825 a pound. Raw sugar slumped 2.3 percent to 20.86 cents a pound. Wheat declined 1.8 percent to $7.585 a bushel, corn fell 2.6 percent to $7.1025 a bushel and soybeans retreated 2.4 percent to $13.1975 a bushel. Meanwhile, crude slumped below $100 a barrel for the first time since March 17. Copper for delivery in three months fell 3.3 percent to $8,820 on the London Metal Exchange. Aluminum, nickel, zinc, tin and lead also retreated. In the U.S., gold futures dropped to 1446.100 as of 3:30 EST, a drop of 3.25 percent. “The market is clearly vulnerable,” Corrigan said. “Gold would be the least of your worries, it's going to be the industrial cyclical commodities, it's going to be the coppers and the tins and the crudes that get hit the worst.” Commodities dropped the most in almost two years, paring this year's gains to 10 percent, on speculation that economic growth will slow as central banks seek to cool inflation by raising borrowing costs. The Standard & Poor's GSCI Index of 24 raw materials fell as much as 5.9 percent to 688.25, the biggest drop since June 22, 2009, and was at 695.61 by 4:22 p.m. in London. The gauge has retreated for four days, the longest losing streak since mid-March. Silver, crude oil and heating oil led the declines. The European Central Bank President Jean-Claude Trichet said today the bank will monitor inflation risks “very closely,” suggesting it may wait until after June to raise interest rates again. The ECB raised interest rates on April 7, joining China, India, Poland and Sweden in seeking to control inflation. The cost of living in the U.S. rose at its fastest pace since December 2009 in the year ended in March, the same month when Chinese consumer prices rose by the most since 2008. The slump in raw materials comes as Glencore International AG sells shares in an initial public offering which may value the Baar, Switzerland-based commodity trader at about $61 billion. Goldman Sachs Group Inc. in reports on April 11 and 15 told investors they should be “underweight” commodities in the next three to six months. The bank still expects commodities to advance about 10 percent over the next 12 months. Crude oil fell 6.3 percent to $102.36 a barrel in New York trading, while Brent oil retreated 6.1 percent to $113.82 a barrel in London. Gasoline declined 4.5 percent to $3.1751 a gallon on the New York Mercantile Exchange and natural gas fell 5.3 percent to $4.334 for a million British thermal units. The U.S. government may say tomorrow nonfarm payrolls increased 185,000 in April after gaining 216,000 the previous month, according to the median forecast of 84 economists surveyed by Bloomberg. The number of claims for U.S. unemployment benefits unexpectedly rose last week, the Labor Department said today. China will report its trade balance, inflation and industrial production numbers next week. “People are concerned what the data are going to show in the next seven days with regards to monetary policy,” said Walter de Wet, head of commodities research at Standard Bank Plc in London. “There is a lot of data coming out, and the expectations are that it's going to be fairly bearish. So there is some risk off the table across commodities.” Copper for delivery in three months fell 4 percent to $8,757.50 a metric ton on the London Metal Exchange. Aluminum, nickel, zinc, tin and lead also retreated. Gold for immediate delivery declined 2.1 percent to $1,485.24 an ounce while platinum dropped 3.2 percent to $1,764.80 an ounce. Silver futures traded on the Comex exchange extended a decline into a bear market to trade at $36.12 an ounce after CME Group Ltd. raised margin requirements by 84 percent in less than two weeks. The metal may fall to $34 an ounce by the end of the week, Standard Bank's De Wet said. In agricultural markets, cocoa for July delivery slid 4.8 percent to $3,057 a ton on ICE Futures U.S. in New York. Arabica coffee declined 3.1 percent to $2.8535 a pound. Raw sugar slumped 3.1 percent to 20.69 cents a pound. Wheat declined 2.7 percent to $7.5125 a bushel, corn retreated 3.5 percent to $7.04 a bushel and soybeans fell 3.1 percent to $13.1075 a bushel. Funds were still bullish commodities at the end of April, after the S&P GSCI Total Return Index beat bonds, stocks and the dollar every month since December, the longest in at least 14 years. Managed-money funds held a net 1.49 million futures and options in 18 commodities by April 26, 57 percent more than a year earlier, according to U.S. Commodity Futures Trading Commission data compiled by Bloomberg. High commodity prices have yet to crimp demand as inventories are tight, and getting out now would be “premature,” Hussein Allidina, the head of commodity research at Morgan Stanley in New York, said on April 29. Morgan Stanley, operator of the world's largest brokerage, is still “very long” crude and corn, and favors wheat and gold, Allidina said in an April 29 telephone interview. “Things are down 5 percent all the times,” Jim Rogers, the chairman of Rogers Holdings, said by phone. “This is normal.” --Bloomberg News--