When risk aversion measures reached dizzying heights not seen since the 1998 Long Term Capital Management fund default, key commodities fell in tandem with tumbling stock markets while the low-yielding Japanese yen and safer bond markets rose. But some commodities particularly wheat have prospered, as market fundamentals dominated sentiment more than the broader credit issue.
Its a very difficult environment when there is a de-leveraging event across the world, said Edward Hands, senior portfolio manager at Commerzbank Alternative Investments. But the nice thing about some of the commodities especially food ones is that they will continue to be affected by other factors like weather, viruses, droughts and disease plus general increasing demand, he added.
Broader commodity indexes reflected this months losses in some key sectors including metals and oil, with the S&P GSCI falling to a near three-month low last week having hit 11-month peaks early in the month. The Reuters/Jeffries CRB index also fell sharply.
Douglas Hepworth, director of research at commodity fund manager Gresham Investment Management, said liquidity was a key factor to consider in the recent losses as the first effect of a liquidity crisis is a sell-off in the most liquid objects.
During August, 1998, both equities and commodities experienced significant drops. During that month the impending collapse of Long Term Capital Management threatened to presage a systemic liquidity crisis, he said.
LTCM controlled some $100 billion of assets in 1998 but collapsed in the wake of the Russian debt crisis, threatening the global financial system until the US Fed responded by slashing interest rates.
The pattern of equities and commodities hit by liquidity problems explained a tumble in oil prices from record highs during the recent bout of turbulence, and could also signal further drops in base metals if risk aversion flares up again. Gold, normally a safe-haven in times of economic stress, has behaved much like other assets in the recent volatility hitting a seven-week low in mid-August as fears of a global liquidity crisis gathered pace. But at the same time inflows to gold exchange traded funds, which allow investment in the commodity without physical ownership, hit record highs.