Banks’ pullback from commodities trading is weakening the link between raw materials and equities and helping to re-establish supply and demand as the main factor in setting prices, United Nations researchers say.
As Barclays Plc, JPMorgan Chase & Co. and Morgan Stanley leave parts of the business, prices of commodities are moving more independently of stocks. The correlation between U.S. equities and corn, cattle and wheat fell to less than 0.05 in January, compared with almost 0.3 in 2008, an analysis by David Bicchetti and Nicolas Maystre, economic affairs officers at the UN Conference on Trade and Development in Geneva, shows.
Banks, hedge funds and other financial institutions piled into physical commodities and derivatives over the past 12 years, amplifying a run-up in prices for everything from copper to oil, in short supply before the 2008 global recession, the UN found in a 2011 study. The exodus is nudging futures markets back toward their original function, as a way for farmers, miners and other companies in the commodities business to hedge against price swings.
“Now, we’re getting back to where strict supply-demand gives us truer pricing and hopefully better ability to look ahead,” Richard Nelson, chief strategist at Allendale Inc., a broker and consultant in McHenry, Illinois, said in an April 21 phone interview. For people who use the contracts to hedge, “it’s a completely good thing,” he said.
The weaker correlation with stocks also restores commodities’ appeal as a way for investors to diversify, according to Citigroup Inc. A correlation of 1 would mean prices moving in lockstep.
The research, sent in an April 15 e-mail, hasn’t yet been incorporated into an Unctad report, so isn’t an official UN statement. Unctad regularly reports on commodities’ role in developing economies.
Raw materials outperformed equities and bonds last quarter for the first time since 2008, making commodities more valuable for diversifying, Citigroup analysts led by Ed Morse said in an April 14 report.
In the next 12 months, 54 percent of investors surveyed by Barclays plan to increase their stake in commodities, compared with 27 percent who did in the preceding year, Barclays analysts led by Kevin Norrish said in an April 4 report.
“It’s time to again take commodities seriously,” Citigroup said in the report.
Barclays is exiting the “majority of commodities business” while staying in precious metals, derivatives tied to the price of oil and U.S. gas as well as index products, the London-based bank said April 22 in an e-mailed statement. Barclays cut jobs in January as part of a reduction in fixed income, currencies and commodities, and shut power-trading desks in the U.S. and Europe in February.
Deutsche Bank AG, based in Frankfurt and Germany’s largest bank, said in December it would get out of dedicated energy, agriculture, dry-bulk and industrial-metals trading, cutting about 200 jobs. Bank of America Corp., located in Charlotte, North Carolina, said in January it would dispose of its European power and gas inventory as opportunities shrink and increasing regulation curbs trading.
In December, New York-based Morgan Stanley agreed to sell its oil-merchant unit to OAO Rosneft, Russia’s state-run producer. JPMorgan, located in New York, said in March it would sell its physical commodities unit to Mercuria Energy Group Ltd. for $3.5 billion, ending a five-year stint in the business led by Blythe Masters, an early proponent of credit-default swaps who said she would leave the bank.