Commodities Market Battered by Slowdown, Flooding

Declines mirror last year as global economic concerns pressure prices

Most commodities fell in May, with the Dow Jones-UBS Commodity Index Total Return down by 5.06%. Similar issues dragged on the market this year as last: the debt crisis in the eurozone and weak economic growth worldwide, with record flooding in the U.S. a new factor. Of the 19 commodities in the index, 16 were lower, with precious metals the weakest of the lot.

Other affected sectors within the index included energy, with flooding of the Mississippi River threatening to disrupt U.S. distribution channels, and agriculture, suffering from a negative USDA world agricultural report; livestock also fell on increased inventories.

Last May saw similar results, according to Nelson Louie, global head of commodities at Credit Suisse Asset Management. He said in a statement, "While commodities markets experienced a pullback during the month of May, it is worth noting that the timing of this month's correction matches last year's decline, with the markets focusing on very similar issues—slowdowns in global economic growth and sovereign debt concerns in Europe."

Louie went on to point out, however, that a tightening supply amid rising global demand could exacerbate price action for the time being. "The potential for weather-related disruptions," he continued, "could affect key agricultural commodities, especially as we enter the growing/harvest seasons for key producing nations for corn, wheat, cotton and coffee."

Christopher Burton, senior portfolio manager for the Credit Suisse Total Commodity Return Strategy, added, "Meanwhile, potential geopolitical unrest will be a primary focus as we approach the summer season, as any further disruptions may affect OPEC's ability to control oil prices. In addition, continued accommodative monetary policy in the U.S. increases the odds of inflation overshooting expectations. We believe investors can continue to benefit from the diversification benefits that commodities provide."

The Credit Suisse Total Commodity Return Strategy group has produced a white paper titled, "How Commodities Can Help Investors Face the Uncertainty of the Inflation/Deflation Debate."

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