Commodities Lead the Way Down the Rabbit Hole

“Commodities fell for a third day, paced by declines in copper and oil, as manufacturing in China unexpectedly shrank for the first time in seven months and the head of the Federal Reservehinted that stimulus may be tapered.

The Standard & Poor’s GSCI Index (SPGSCI) of 24 commodities dropped as much as 1.2 percent to the lowest level in a week, and was 0.5 percent lower at 623.11 at 11:46 a.m. inLondon. Copper in London, seen as an indicator of economic activity because of its use in construction, lost 2 percent to $7,324 a ton. Oil in New York sank 0.7 percent.

The preliminary reading for a Chinese Purchasing Managers’ Index from HSBC Holdings Plc and Markit Economics missed analysts’ estimates and came in below the level of 50 for May, indicating a contraction. China is the biggest metals consumer and the second-largest oil user. The S&P GSCI has fallen 3.7 percent this year as base metals dropped on prospects for surpluses while gold and silver tumbled into bear markets.

“China’s PMI data coming in below forecast is adding a strong downdraft across most commodity markets,” said Mark Keenan, a director of commodities research and strategy at Societe Generale SA in Singapore. “The comments from the Fed, hinting at the scaling back of quantitative easing if the economy improves further, have driven the dollar higher, which is also contributing to the general weakness.”

Fed Chairman Ben S. Bernanke said yesterday that the U.S. central bank may reduce the pace of asset purchases in the next few meetings if policy makers can be confident of sustained improvement in the world’s largest economy. The Dollar Index rose to its highest in almost three years today before declining as the yen surged after stocks tumbled.

Labor Market

Bernanke also said in testimony to Congress yesterday that a premature withdrawal of stimulus could endanger the U.S. economic recovery. Many Fed officials said more labor market progress is needed before paring $85 billion in monthly asset purchases, minutes of their last meeting showed yesterday….”

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