(Agrimoney) – Cotton and sugar futures are poised for a hangover from their resilience last year – becoming targets for index fund selling which looks like being even more severe than previously thought.
Societe Generale named New York-traded cotton and raw sugar as the commodities which will suffer, relatively, the heaviest selling pressure during the index fund rebalancing process, which starts on Friday for the S&P GSCI and Bcom indices, which hold $125bn in assets between them.
Rebalancing is an annual process which sees funds rejig their portfolios to the weights dictated by their indices – meaning selling top performers of the previous year, and buying the laggards.
While, this time, that implies buying for the likes of nickel – and Chicago livestock contracts – which fared relatively poorly over 2015, it will mean downsizing for more resilient commodities including many agricultural commodities.
Ags’ links to food, for which demand is relatively stable, means their price movements tend to correlate less closely than those of many industrial commodities with broader economic fortunes.
‘Significant effect
The reweighting process, which ends on January 14, stands to prove “significant” for nickel, sugar and cotton markets, with lean hogs and feeder cattle “also impacted”, Societe Generale analyst Mark Keenan said.
It will “likely have an impact on prices, curve structure and sentiment ahead of, and also during, the rebalancing period”.
Mr Keenan highlighted that reweighting is “typically price insensitive”, typically occurring at set times – late in the session – rather than being linked to intraday moves in market prices.
“As such, price moves can be exaggerated during this period, and can often provide attractive trading opportunities”.
Most affected
For New York cotton, which was the only major commodity to show positive returns in 2015, according to Bcom measures, SocGen forecast selling equivalent to19.5% of daily volumes during the rebalancing period.
Raw sugar futures, which gained last year on a spot contract basis, will attract selling equivalent to 21% of typical trading volumes.
Corn and soyoil will attract more modest selling.
Meanwhile, feeder cattle futures will see buying equivalent to 17.2% of daily volumes, and lean hog futures 19.3%.
Arabica coffee will also see notable buying, at a little over 9% of trading volumes, with Kansas City wheat seeing purchases equivalent to 7.3%.
