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Commodity Markets Slightly Lower In March, Fundamentals Remain Supportive

Commodities were lower in March, despite improving macroeconomic backdrop.

Nelson Louie, Global Head of Commodities in Credit Suisse’s Asset Management division, said, “While commodities were generally lower in March, this was due to commodity markets remaining vulnerable to global supply shocks. We believe that the majority of the price increase of oil over recent months was driven by tight fundamentals, with much of the risk premium related to supply risk, such as geopolitical risk. Agriculture remained vulnerable to weather disruptions and has recently been supported by reports of dry weather in South America and a dramatic cooling of temperatures for much of Europe in February. In base metals, new mining capacity proved more difficult and expensive to obtain while labor disputes continue to threaten existing production. This may bode well for component prices as macroeconomic risk subsides.”

Christopher Burton, Senior Portfolio Manager for the Credit Suisse Total Commodity Return Strategy, added, “The commodity markets were disappointed by dips in Chinese and European preliminary economic indicators, along with several of the regional surveys in the US. While some suggested that the global rebound is running out of steam, recent positive data – including housing starts, building permits and existing home sales – have contributed to further optimism in the market. In addition, the decline in US weekly initial jobless claims at the end of March provided reassurance that the US labor market recovery remains on track. We believe investors will continue to benefit from the inflation protection and diversification potential of holding diversified commodities exposure within a portfolio of traditional assets.”

The Dow Jones-UBS Commodity Index Total Return was down by 4.14% in March. Overall, 15 out of 20 index constituents decreased in value. Livestock was the worst performing sector, down 8.06% for the month. Weaker than expected domestic demand outweighed continued strong exports, further pressuring Lean Hogs. Energy decreased, down 7.24%. While Natural Gas was the main contributor to negative returns, petroleum prices were also under pressure as discussions surrounding a potential bilateral Strategic Petroleum Reserves (SPR) release involving the US and the UK impacted markets. Industrial Metals declined, losing 5.39% for the month. Concerns over potential near-term softness in Chinese demand weighed on the sector. Inventory builds in Chinese warehouses fueled concerns that future demand may soften. Precious Metals also declined, down 3.37%. Both Gold and Silver had a difficult start to the month following Federal Reserve Chairman Ben Bernanke’s semi-annual economic report to Congress on February 29th, in which he did not signal further monetary easing. Agriculture was relatively unchanged, up 0.34%. The USDA’s Prospective Plantings report and Quarterly Stocks report were released at the end of the month, revealing lower-than-expected acreage numbers for Soybeans and Wheat. Corn, while declining for the month, rallied into the end of March as the same report showed that ending stocks were near multi-year lows.

The Credit Suisse Total Commodity Return Strategy group periodically produces updates on relevant industry topics. For a copy of the team’s white paper, “Commodities Outlook: Increased Volatility, Increase Opportunity?” , please contact your Credit Suisse Relationship Manager.

About the Credit Suisse Total Commodity Return Strategy
Credit Suisse’s Total Commodity Return Strategy has been managed for 17 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 both a quantitative and qualitative 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.

As of March 31, 2012 the team managed approximately USD 10.9 billion in assets globally.

An investment in commodities is not a complete investment program and should represent only a portion of an investor’s portfolio management strategy. Investment in commodity markets may not be suitable for all investors. Commodity markets are highly volatile and the risk of loss in commodities and commodity-linked investments can be substantial.