Commodity Markets Adversely Affected by May Market Uncertainty; Recent Price Weakness May Offer a Favorable Entry Point into the Asset Class

Jun 14, 2010, 09:51 ET from Credit Suisse AG

NEW YORK, June 14 /PRNewswire-FirstCall/ -- Commodity markets suffered in May as negative investor sentiment and broad-based macro-themes resulted in losses. However, recent price weakness may provide opportunity as fundamentals remain strong.

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Andrew Karsh, Co-Lead Portfolio Manager for the Credit Suisse Total Commodity Return Strategy, said, "Wavering investor sentiment certainly had an impact on commodity prices last month, however, over the long term we believe commodity prices will be determined by fundamental dynamics such as supply and demand, marginal costs of production, storage costs, etc. We continue to see demand recovering for key commodities, like crude oil and copper, in both the developed world and emerging markets, particularly China, which could increase the likelihood of future capacity constraints, leaving only higher prices to balance supply and demand. Certain risks may also lead to higher commodity prices over time, for example, the Deepwater Horizon oil spill reminds us of the costs and risks involved in obtaining new sources of oil, while the proposed 'resources super tax' in Australia demonstrates the costs mining companies may incur due to political decisions."  

Christopher Burton, Co-Lead Portfolio Manager, added, "Other factors could also weigh on the market over the long-term, such as the proposed $1 trillion European Central Bank, Euro zone, and IMF combined support package. While the details of the proposal are not yet clear, such a large support package could ultimately result in inflation, which could ultimately benefit commodities. We don't believe such a scenario is priced into commodity prices at this time and recent price weakness may offer a favorable entry point for those considering adding to their existing commodity exposures, particularly with inflation expectations remaining relatively low in recent months."

The Dow Jones-UBS Commodity Index Total Return was down 6.92% in May, bringing the year-to-date performance to -9.89%. Among 19 index constituents, economically sensitive commodities, like the petroleum complex and base metals, were among the worst performers. Natural Gas was the strongest performer during the month, returning 7.20% as a result of increased demand, due to an early onset of the cooling season in parts of the U.S., forecasts for a heavy hurricane season and curbs on off-shore drilling. Gold continued its positive momentum, up 2.77% in May and 10.47% year-to-date, due in part to recent fluctuations in the currencies market.  Nickel was the weakest commodity for the month, down 18.92% as economic uncertainty led to a pullback in expectations of growth oriented activity.  Crude Oil was also down 16.28% in May, which resulted in negative year-to-date performance for the commodity.  

The Credit Suisse Total Commodity Return Strategy group periodically produces updates on relevant industry topics. For a copy of their latest whitepaper, "Capitalizing on Any Curve: Clarifying Misconceptions About Commodity Indexing", please email ir.betastrategies@credit-suisse.com.

About the Credit Suisse Total Commodity Return Strategy

Credit Suisse's Total Commodity Return Strategy has been managed for fourteen years and seeks to outperform the return of a commodities index, such as the Dow Jones–UBS Commodity Index Total Return or the S&P GSCI Total Return Index, using a quantitative commodity research process. Commodity index total returns are achieved through:

  • Spot Return: price return on specified commodity futures contracts;
  • Roll Yield: impact due to migration of futures positions from near to far contracts; and
  • Collateral Yield: return earned on collateral for the futures.

About the Portfolio Managers

Christopher Burton, CFA, and Andrew Karsh are Co-Lead Portfolio Managers of the Credit Suisse Total Commodity Return Strategy. As of May 31, 2010 the team managed approximately USD 4.8 billion in assets globally.  

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