Commodities Take a Direct Hit From the Subprime Fallout

Includes: DBA, DBC, GSG, USO
by: Hard Assets Investor

Last week, the World Trade Organization warned that global economic growth could fizzle in 2008 because of the subprime mortgage crisis. On Thursday, investors of all stripes, though hedge funds were implicated by many, in particular, were liquidating commodities assets as they looked for safer places to put their money or tried to cope with the liquidity crunch. Although there was a late-day rebound in the U.S. market, it couldn't reverse the carnage, which was perhaps more notable for its breadth than its depth. The Dow Jones-AIG Commodity index was down 3.4% for the day Thursday, one of the largest one-day drops in its entire history going back to 1991.

Metals and oil were among the hardest hit. Copper fell 7.7% in unusually heavy trading despite an earthquake in Peru, a major producer, which under most circumstances would have bolstered the market. Other base metals to be hit were zinc, down 8.3%; lead, down 5.7%; nickel, down 5.6%; and aluminum, down 3.3%. Meanwhile, among precious metals, gold fell 3% and silver fell 8%. Palladium was down 6%.

WTI crude was down 3.7% to $70.65 a barrel on the NYMEX, while Brent crude was down 3.5% to $69.13 on the ICE, with fears of a potential growth slowdown in the U.S. outweighing confidence in the American appetite for oil.

Agricultural commodities were also hit, with September contracts on the CBOT trading lower. Wheat was down about 2%, while corn was down slightly more than 4%. Meanwhile, soybeans fell roughly 6%.

The subprime market fallout will likely continue to rattle financial markets for some time, although the extent is unclear. Should it result in the global economic slowdown the WTO warned of, investors could probably expect more days like Thursday.