| Reuters/Jefferies CRB Index | 278.68 | +0.78 |
| Rogers Intl Total Return | 3,479.99 | +14.28 |
| S&P GSCI | 616.02 | +4.72 |
I don't agree with JPM's timing, thinking that there is more excess to be flushed out of the system, but JPM is the Behemoth in commodity derivatives so what do I know.
In the June 18 post: "Commodities: Backwardation vs. Normal Backwardation" I mentioned en passant, "We're going to be hearing these terms a lot in the next few weeks."
Here goes.
From ZeroHedge:
Following the drubbing in commodities in Q2 it is was only a matter of time that the pendulum swung the other way. At least that is the view of JPMorgan's commodities team led by Colin Fenton who says to "go overweight commodity indices now."
JPM's summary: "It’s our first OW call on commodities since September 2010… we turned underweight commodities as an asset class in November 2011, shortly after it became apparent that Europe and Australia had entered manufacturing recessions and commodities were likely to underperform equities and bonds over the following 6 to 12 months, likely yielding negative returns in 1H12. Over the past year, we have grown more positive on the asset class, as energy has improved, expected menaces in bulks and metals have arrived, and sentiment across commodities has belatedly soured. However, our strategies have sought to be directionally neutral. Now, we move to recommend a net long, overweight exposure for institutional investors for the first time in more than two years, based on ten fundamental factors we quantify in this note." Yes, that includes gold, although as a hedge JPM adds: "Liquidity could fall quickly in summertime. Buy 25-delta puts in oil, copper, and gold to protect a core position in commodity index total return swaps."
Why does JPM come out with this overweight reco now, when commodities are sliding? Their take.
Concerns having been dispatched, JPM's advice to institution clients is simple:"Like other global markets, commodity prices are buckling on rising concerns about China and the Federal Reserve. It is important to be specific about what these concerns are. The new fears are not that Chinese growth is slowing or that the US central bank will taper its QE3 asset purchases. Both are inevitable outcomes that have long been embedded in commodity forward curves. The actual concerns are: (1) the large shadow banking sector in China might soon trigger an unexpected financial crisis, like the one that emerged in Asia in July of 1997, and (2) the FOMC might simultaneously be making a policy mistake in putting its own growth and inflation forecasts ahead of the markets’ fear about Chinese finance and the evidence that disinflation in the real economy is bulldozing inflation expectations in markets. These concerns are legitimate. A sturdily low-vol commodity regime has suddenly been asked to assign probabilities to these two scenarios. Neither is a zero probability. Nor is either likely a baseline outcome in 2013."
Keep an eye on crude backwardation:Our analysis concludes that it is in the best interests of most commodity index investors to buy immediately. For the first time in more than 2 years, we recommend an overweight allocation to commodities. In our own methodology, we define this allocation as a 5% to 7% net long exposure in an institutional portfolio, up from the 3% to 5% directionally neutral exposure we have been recommending.
We anticipate that when commodity markets move higher, they will likely move more quickly than seems possible today, led by a seasonal pickup in global crude runs. One of the strongest clues lies in the current term structure of the NYM WTI forward curve.
If oil demand is so soft and oil supply so ample, why is this curve in the strongest backwardation yet observed in this business cycle? The M3-M6 and M6-M12 spreads are the most positive they have been in 6 years. The last time these structures emerged, in 2007, the curve steepened so rapidly and powerfully that the spot price moved from $65 per bbl to the all-time nominal high of $147 per bbl in less than nine months. To be clear, we do not expect as strong a move this time. But we are saying that buying the backwardation in NYM WTI (26.6% portfolio weight in the S&P GSCI) is one of the best commodity investments we have seen available in this asset class in years....
...MUCH MORE
