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Commodity Market Declined in May as Supply Risks Subsided

Commodities were lower in May as some immediate supply concerns eased.

Nelson Louie, Global Head of Commodities in Credit Suisse’s Asset Management business, said, “While commodities declined in May as some of the supply concerns that impacted key commodities in the first quarter subsided, we believe that the potential for production risks continue to exist. Weather may continue to play a key role driving commodity returns in 2014, particularly in Energy and Agriculture, should extreme patterns continue. For example, the fundamentals for natural gas are stronger than they have been in the last five years following an extraordinarily cold winter for much of the US, leading to robust heating demand and causing supply and transportation hurdles. To reach normal US inventory levels ahead of next winter would require the largest ever storage injection over a six-month period. At the same time, a hot summer could potentially increase power generation due to cooling demand.”

Christopher Burton, Senior Portfolio Manager for the Credit Suisse Total Commodity Return Strategy, added, “The US economy contracted for the first time in three years in the first quarter as it buckled under a severe winter, but there are signs it has rebounded and is on track to recover solidly from the setback in the first quarter. Recent data shows a rebound in residential construction, and leading indicators continue to signal a pick-up in corporate investment. The Federal Reserve will likely continue to reduce its monthly asset purchases and wind down its quantitative easing program, but risks continue to be skewed to US economic growth coming in stronger than anticipated going forward. Correlations between commodities and traditional asset classes have stayed low as conditions have normalized. We continue to expect commodities to provide valuable diversification benefits going forward.”

The Dow Jones-UBS Commodity Index Total Return declined 2.87% in May. Overall, 13 out of 22 index constituents posted negative returns. Agriculture was the worst performing sector, down 7.18%. In addition to Coffee and Wheat, Corn also declined due to expectations of increased South American exports and higher 2014 ending stocks in China. Precious Metals decreased 3.55% as positive sentiment led to record-high US equity valuations, declining volatility across markets, and a further reduction in the safe-haven appeal of gold. Lower physical gold demand out of India and China also weighed on the sector. Livestock ended the month 2.03% lower after the World Organisation for Animal Health stated impacts from the PED virus may ease as the US hog population develops immunity to the disease. Energy declined 0.66%, led lower by Natural Gas. Energy Information Administration storage data revealed a narrowing supply deficit compared to the five year average. Industrial Metals was the best performing sector, up 2.71%, with all sector components posting positive returns.

About the Credit Suisse Total Commodity Return Strategy
Credit Suisse’s Total Commodity Return Strategy has been managed for over 19 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 May 31, 2014, the Team managed approximately USD 11.5 billion in assets globally.