Commodities Corner: Commodities stumble, but still on track for first yearly gain since 2010

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Markets/commodities reporter

Lean hogs, soybeans and crude oil all lost ground in the third quarter, but the commodities market held its grip on the first yearly gain since 2010.

Commodities typically underperform in the third quarter, but they logged their strongest third quarter since 2013, analysts at Citi Research said in a recent note.

The Bloomberg Commodity Index BCOM, +0.14%  is down nearly 4% for the quarter, but remains up about 8.6% year to date. The index hasn’t posted a calendar-year gain since 2010, when the index saw a nearly 17% climb. It lost almost 25% in 2015, but gained nearly 13% in the second quarter of this year.

It was “not a hot summer for commodities, but the winter is unlikely to be as cold to investors,” Citi analysts said.

For the quarter ended Sept. 30, the largest commodity gainers included palladium PAZ6, +0.58% up nearly 21% according to FactSet data, and cotton CTZ6, +0.56% up roughly 6%. On the downside, lean hogs LHZ6, -5.85% down a whopping 47%, and soybeans SX6, +0.34% off 17%, suffered the biggest losses.

Read: Palladium futures settle at highest level in over a year

Citi offered an overview of quarterly price performance for commodities as of mid-September in the chart below:

Lean hogs have lost the most for the third quarter, as of mid-September 2016.

“Much like in 2014 and 2015, 3Q this year has marked a turnaround in commodity performance, but relative to those years, the 3Q commodity selloff this year has been less catastrophic and, we expect, more temporary,” Citi analysts said.

They pointed out that some soft agricultural commodities—those that are grown, not mined—including sugar SBH7, -2.36%  and coffee KCZ6, +0.77% “rallied hard” as supplies tightened. Among so-called hard commodities, thermal coal was a “surprise outperformer.”

Coal has benefited from an apparent rise in Chinese demand but analysts have voiced concern that the price gains for the energy source aren’t sustainable.

Lean hogs, meanwhile, have suffered from a seasonally weak period for demand that is likely to last for about another month, said Ned Schmidt, editor of the Agri-Food Value View report.

The soybean market has seen ideal weather in the U.S., which has pressured prices. TheAgriculture Department is projecting the U.S. soybean crop to come in at a record.

Read about commodity performance during the first half of the year.

Prices for West Texas Intermediate crude oil CLX6, +0.29%  were also down by a modest amount, nearly 0.2%, for the quarter as traders navigated conflicting remarks from crude producers ahead of the much-anticipated meeting of the Organization of the Petroleum Exporting Countries. At the summit, held this past week, members agreed on a plan to cutback production and a set target for collective output, but won’t implement the plan until Nov. 30.

Read: Doubts linger over OPEC’s preliminary deal on oil output

And by the time gold futures GCZ6, -0.41%  settled Friday, they turned lower for the quarter, down nearly 0.3%.

Read: How a gold miner turned a $1 million investment into $3 billion

The precious metals market has kept a close watch on when and at what pace the U.S. Federal Reserve will raise interest rates as higher interest rates can boost the dollar and dull demand for dollar-denominated commodities.

The Fed stood pat on rates at the September meeting, but some comments from officials since then have leaned toward the possibility of an increase in December.

Read: Federal Reserve gives gold a reason to rise

Commodity investment inflows suggest ‘investors appear to see greater potential in the commodity sector than they have for a very long time.’

Kevin Norrish, Barclays

Global market concerns surrounding German financial giant Deutsche Bank DB, +14.02% have kept investors on edge and helped provide a floor for gold as investors look for safer bets.

See: Why Deutsche Bank had global markets swooning

Overall, the commodities sector has seen “exceptionally strong” investment flows, with January to August inflows at $54 billion—an all-time high for the first eight moths of any year, according to a research note from Barclays Research issued Thursday.

“This suggests that investors appear to see greater potential in the commodity sector than they have for a very long time,” Barclays analyst Kevin Norrish said.

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