The financial and sovereign debt crisis continues to set the agenda for almost every investment decision being taken at the moment. During May the crisis in Europe escalated (again) and turned a dangerous corner with the focus switching to Spain, where a bank funding crisis is putting the government under severe pressure, Ole S. Hansen of Saxo Bank said Sunday. In Greece, the new election is still weeks away with the outcome potentially putting Greece's future within the eurozone at risk. China, the main global growth engine since 2008 is slowing, and the US economy is in a mid-cycle slowdown. These events helped drive investors toward secure government bonds, with two-year German yields going negative, and safe currencies such as the Japanese Yen and especially the US dollar, which rose to a 23-month high versus the euro. Commodities, meanwhile, saw one of the biggest monthly drops since 2008, with the broad based Dow Jones-UBS Commodity Index falling by more than nine percent, as all individual sectors, as seen below, came under heavy selling pressure. The energy heavy S&P GSCI recorded its worst month since 2008, slumping by almost thirteen percent as both WTI crude and Brent crude fell more than 20 percent from their highs and technically entered into a bear market. Precious metals put in the best relative performance, somewhat indicating that the safe-haven attraction of gold is not completely gone. Considering the strong move in the dollar, gold's losses were limited and it even recorded a small gain measured in Euros. It never the less continues to struggle to rekindle its attraction among leveraged investors such as hedge funds. The energy sector, led by WTI crude, was the hardest hit, as focus increasingly switched from geo-political risks to a slowdown in demand. The bursting of the speculative bubble in both Brent and WTI crude also played an important role in explaining the dramatic move lower. The agriculture sector was also exposed to elevated levels of volatility with gains in livestock and wheat more than offset by major losses in cotton, corn and soybeans, mostly due to good weather prospects and speculative investors reducing their long exposure. Crude oil in a technical bear market The month of May, just like last year, has turned out to be a horrible month for oil investors. The price of both WTI and Brent crude has collapsed due to a dramatic shift in focus away from fear of geo-political motivated price spikes towards slowing demand. Both crude varieties have now fallen by more than 20 percent which is the technical description for when a market moves into a bear market. A strong dollar, weaker fundamentals and the bursting of the speculative bubble have done the damage to prices and while it is bringing a lot of relief to consumers, some of the major producers, who requires high oil prices in order to balance their budgets, will soon begin to feel the pain and it could trigger a slowdown in supply in order to bring the price slump under control. Saudi Arabia have now for months been arguing that $100 crude would be a reasonable price for both sides and now that it has been reached additional comments will be watched with interest as the record production from Saudi Arabia during the last few months have helped support the current softness in prices. Speculative investors have once again felt the pain of a trade going badly wrong, as they have scrambled to reduce their net long positions in WTI and Brent crude from a record 500 million barrels back in March. As of May 22 this position was still some 326 million barrels and further dramatic reductions would have taken place up until today. In comparison a similar sell-off from March to October 2011 caused the net long positions to be halved.
