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Morning markets: economy fears, end of CCCP sink commodities

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Investors switched back from the rifle to the shotgun on Tuesday.

A broad line-up of assets, including agricultural commodities, bore the blast as investors switched "risk off" in the face of an array of downbeat news.

Japan raised the severity rating of the nuclear crisis at its Fukushima plant to the highest level, if saying that radiation leakages were well below those after Ukraine's Chernobyl disaster in 1986.

Meanwhile, investors faced poor broader economic factors too.

UK retail data for May, for instance, were the worst in at least 16 years, with a separate report showing the country's house prices in decline, outside London.

Morgan Stanley said that the focus of economic growth would switch to later in the year. Adam Parker, US equity strategist at the investment bank said that "our sense is that we are getting close to the point where investors should become a bit more defensive".

Indeed, there are continued background concerns over what the removal of easy money might mean for the Western economies it has been supporting.

End of the CCCP

Shanghai stocks lost 0.6%, while Tokyo shares closed 1.7% lower.

And commodities had the extra headwind of a recommendation from Goldman Sachs that investors close the bank's so-called CCCP trade of going long on raw materials such as crude, copper and platinum. (It had already recommended taking profits on the ag parts, cotton and corn, while remaining optimistic on soybeans.)

As Mike Mawdsley at Market 1 noted, the CRB commodities index had reached a critical technical level, at the 62% retracement from its last peak – a point which could prove the platform for the next upside leg, but "is also a place where things could cool off".

It turned out to be the latter.

Copper

lost more than 0.5% in Shanghai, while

oil

markets lost further ground, sending New York crude back below $109 a barrel.

Drier still

Farm commodities generally fared no better, despite for

wheat

potential support from the latest weekly US Department of Agriculture crop progress report showing the condition of the US winter wheat crop falling again.

The proportion rated "good" or "excellent" eased by 1 point to 36%, compared with 65% a year ago.

The decline was centred on the moisture-deprived states, such as Oklahoma, growing the hard red winter wheat traded in Kansas.

Stlll, the data failed to prevent Kansas wheat from a 1.3% decline to $9.06 ¾ a bushel for May by 07:40 GMT (08:40 UK time). Nor did it offer the grain that much advantage over its Chicago, soft red winter wheat peer, which was down 1.5% at $7.86 a bushel.

Speculators close favourite spreads

There are forecasts for, later this week even, rain for parched hard red winter wheat areas.

But there are also technical factors at play, with investors closing a popular traded of "long Kansas, or Minneapolis wheat, versus short Chicago".

"Front month contracts in Kansas and Minneapolis have lost nearly $0.40-a-bushel worth of premium to the May contract in Chicago over the course of the last week," Brian Henry at Benson Quinn Commodities noted.

"However, the spreads are still trading at levels that are very profitable for many traders as some of the spreads being liquidated were established as Chicago traded a premium.

"These spreads have been favourites of the speculative community for the last seven months. So there is reason to believe that the liquidation phase can continue regardless of the fundamental factors at work."

'No difficulties yet'

It was too early for

corn

to be affected much by the crop progress report, which anyway showed the crop 3% planted, bang in line with the average rate.

"Virtually all of those acres, of course, are in the south and Mississippi Delta regions and no states appear to be running into any major difficulties yet," Paragon Economics' Steve Meyer said.

Corn for May fell 1.1% to $7.67 ½ a bushel.

'Tightness easing'

And

soybeans

, which are later planted and so did not show up in the crop progress report, lost ground too, easing 0.2% to $13.65 ½ a bushel, continuing to suffer from the improving South American harvest and signs of weaker demand from China, the top importer.

"With China indicating it has overbooked soybean purchases and will be delaying or cancelling shipments, the tight domestic soybean situation appears to be easing along with prices as risk premium needed to ration demand is shed from the market," Benson Quinn said.

Luke Mathews at Commonwealth Bank of Australia added: "Further falls in US soybean exports are expected from here-on-in as import demand continues to shift to South American origin."

'Anxious wait'

The one crop to dodge a sharp decline was

cotton

, which was supported by the dryness in Texas, the top producing state in the US, itself the top exporting country for the fibre.

"The cotton market is anxiously awaiting improved field conditions in Texas, where dryness is threatening to curb plantings and temper the necessary production response," Mr Mathews said.

Currently the state is, with 11% sown, just 1 point behind the average.

Still, investors were taking no chances, sending the new crop December lot up 0.5% to 139.80 cents a pound.

The old crop May contract was 0.2% higher at 205.06 cents a pound.

By Agrimoney.com

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