CME Group stock settled at $437.20 on Wednesday, a 21-month low close dating back to August 30, 2006. At first glance it would be easy to assume that the underperformance is due to recent reports that New York Mercantile Exchange (Nymex) members are threatening to reject the definitive agreement the Nymex board signed with CME for CME to purchase Nymex but another, perhaps more ominous, factor may be at play.
On May 20 the U.S. Senate Committee on Homeland Security and Governmental Affairs held a hearing entitled “Financial Speculation in Commodity Markets: Are Institutional Investors and Hedge Funds Contributing to Food and Energy Price Inflation?”
The hearing included several speakers who felt that index funds are responsible in great part for the rise in commodity prices. The Commodity Futures Trading Commission (CFTC) maintains, however, that other factors related to traditional supply and demand are at play.
There has been a great deal of analysis in recent years over the affect of long-only commodity funds on the price of commodities but recent spikes in crude oil and agricultural markets appears to have created momentum behind the idea that that the funds are responsible and regulatory action to curb their effect is necessary.
While actual legislation may be a long way off, Committee Chairman Joseph Lieberman (ID Conn.) seems to have reached a conclusion in a committee press release. “My own conclusion is that index speculators are responsible for a big part of the commodity price increases, and we in Congress ought to do the best we can to protect the public interest in an effort to bring food and energy prices down,” Lieberman stated.
The amount of money benchmarked to these indexes requires a careful look at the argument that these funds are responsible for current prices, particularly when you consider recent inflows. One estimate has more than $250 billion benchmarked to commodity indexes, a spike of about $100 billion in the first quarter of 2008. If efforts to restrict allocations to commodity index funds, as was suggested in these hearings, are successful, that is a lot money flowing out of commodity futures markets.
This issue is just getting hot so stay tuned.
Tags: CME Group, Commodity index funds, Nymex
