Oil Leads Quarterly Gains on Middle East Unrest as Earthquake Saps Stocks

Oil’s biggest advance in two years led commodities to a third straight quarterly gain as political turmoil erupted in the Middle East and north Africa, while stocks were curbed by Japan’s strongest earthquake on record. Photographer: Noah Friedman-Rudovsky/Bloomberg

Oil’s biggest advance in two years led commodities to a third straight quarterly gain as political turmoil erupted in the Middle East and north Africa, while stocks were curbed by Japan’s strongest earthquake on record.

Brent jumped 5 percent in March for a three-month gain of 24 percent, helping to drive the Standard & Poor’s GSCI Total Return Index 12 percent higher. The MSCI World Index of stocks fell 1.2 percent last month, paring its quarterly advance to 4.3 percent. Bonds were little changed and the Dollar Index, a gauge of the currency against those of six major U.S. trading partners, lost 3.8 percent.

Rising food prices sparked protests in Tunisia and Egypt and fighting erupted in Libya as unrest swept across a region that produces about 35 percent of the world’s oil. Central banks from China to Brazil raised interest rates, while Japan grappled with the worst nuclear crisis since the 1986 Chernobyl disaster following the March 11 quake that left more than 27,000 people dead or missing. Government bonds may fall through the rest of the year, while stocks and oil extend gains, according to data compiled by Bloomberg.

“The two largest themes have been Middle East-North Africa unrest and the Japan quake,” said Francisco Blanch, head of commodities research at Bank of America Merrill Lynch in New York. “These two things will have important implications for markets over the next quarters and years. We’ve lost a lot of oil supply. The potential for unrest doesn’t stop in Libya.”

Dwindling Returns

The quarterly gain in the MSCI World (MXWO) Index was the third straight, as investors bet radiation leaks from the Fukushima Dai-Ichi nuclear plant following the magnitude-9 quake and tsunami would hamper industrial production and sap growth. The Nikkei 225 (NKY) Stock Average slid 8.2 percent in March, ending a four-month rally and producing a quarterly drop of 4.6 percent. Tokyo Electric Power Co., which runs the plant, lost 78 percent.

The Standard & Poor’s 500 Index climbed 5.4 percent, following gains exceed 10 percent in the previous two quarters. The Stoxx Europe 600 Index was little changed in the quarter, as was the U.K.’s FTSE 100 Index. The MSCI Asia Pacific Index ended the quarter down 1.4 percent, its first loss since dropping 9.8 percent in the three months ended June 30, 2010.

The S&P 500 will climb a further 7.5 percent by the end of the year, according to the median of 13 strategists’ estimates compiled by Bloomberg.

‘Supporting Markets’

“It is remarkable to me how well stocks have done, given all the headlines,” said Jack Ablin, chief investment officer at Chicago-based Harris Private Bank, which oversees $55 billion. “I suspect it’s the largesse of central banks and federal governments that they’ve been pretty much supporting their markets for years now. So far this year, we think negative in bonds, positive in stocks and commodities.”

Global sovereign, corporate, asset-backed and mortgage bonds lost 0.07 percent this quarter through March 30, after tumbling 1.64 percent in the final three months of 2010, the worst performance since losing 1.67 percent in the three months ended June 30, 2008, according to Bank of America Merrill Lynch’s Global Broad Market Index.

U.S. government bonds fell 0.14 percent, extending a 2.7 percent drop in the final three months of 2010, Bank of America Merrill Lynch’s Treasury Master Index shows. German bunds slipped 2.23 percent, following a loss of 2.64 percent in the prior quarter. Portugal’s debt tumbled 8.26 percent as speculation the nation would be the third nation in the euro region to seek a bailout sent yields to all-time highs.

Central Bank Stimulus

Government bonds are falling amid speculation that the world’s major central banks may soon end unprecedented monetary stimulus. European Central Bank President Jean-Claude Trichet said in March that interest rates in the region may rise as soon as this month. Federal Reserve Bank of St. Louis President James Bullard said policy makers should consider curtailing purchases of Treasuries earlier than planned as the economy strengthens.

“If the economy is as strong as I think and hope it will be in 2011, I think it will be time for us to start to reverse our ultra-aggressive and ultra-easy monetary policy,” Bullard told reporters at a financial conference in Prague this week. “We could pull up a little bit shy of our total” of $600 billion in purchases through June, he said.

The yield on the benchmark 10-year Treasury note may rise 42 basis points to 3.89 percent by year-end, from 3.47 percent on March 31, according to the median of 63 strategists’ forecasts compiled by Bloomberg.

America’s Economy

America’s economy, the world’s largest, may expand 3.1 percent this year, up from 2.9 percent in 2010 and the most since 2005, according to the median estimate of 68 analysts surveyed by Bloomberg. Goldman Sachs Group Inc. forecasts a global economic expansion of 4.8 percent this year, while JPMorgan Chase & Co. predicts 4.4 percent. The average over the past two decades is 3.4 percent.

The People’s Bank of China raised interest rates last month for the third time since mid-October. Policy makers in Brazil lifted the nation’s benchmark rate a second consecutive time in March. Central banks in India, Russia, Sweden, Poland, South Korea, Peru, Chile, the Philippines, Thailand and Israel also increased borrowing costs.

IntercontinentalExchange Inc.’s Dollar Index, fell to 75.996, from 79.028 at the end of 2010. The measure dropped to 75.249 on March 22, the lowest level since December 2009.

Sweden, Japan

The Swedish krona rose the most against the dollar among the 16 most-widely traded currencies, appreciating 6.13 percent, followed by the euro’s 5.78 percent gain. The Dollar Index is likely to slip a further 0.3 percent by year-end, a Bloomberg survey showed.

Japan’s yen fell the most, weakening 2.42 percent, while New Zealand’s dollar depreciated 2.4 percent as that nation dealt with the aftermath of its own earthquake.

The yen depreciated tumbled as Group of Seven nations sold the currency on March 18 after it reached its strongest level since World War II. The yen surged in the days following the earthquake on speculation investors would repatriate funds to help the reconstruction effort. It tumbled the most in more than two years against the dollar on the day of the sales.

The euro strengthened against 15 of the 16 major currencies as the prospect of higher interest rates overshadowed concern that the sovereign-debt crisis will worsen. It may weaken to $1.35 by year-end, from $1.4158 yesterday, according to the median of 39 analysts’ forecasts compiled by Bloomberg.

Crude, Cotton

Crude and refined products posted three of the four biggest gains among the 24 materials on the GSCI Index, as anti- government protests in Libya, home to Africa’s largest oil reserves, turned into an armed conflict. Gasoil climbed about 28 percent and gasoline about 24 percent. Brent may decline to $100 a barrel by year-end, from $117.36 in London yesterday, according to forecasts compiled by Bloomberg.

Cotton, which has a 1.1 percent weighting in the gauge, had the biggest increase, rising 39 percent, on surging export demand for U.S. supplies amid crop damage in China and India, the biggest producers. Cotton may still drop about 50 percent to $1 a pound by Dec. 31, according to the median forecast in a Bloomberg survey of 14 analysts and traders.

“The amplitude of the cotton price increase was a real surprise,” said Eugen Weinberg, head of commodities research at Commerzbank AG in Frankfurt. “It’s been a very divided quarter for commodity markets. It started on a very positive note on recovery hopes. On agriculture in general, the sentiment in the first weeks of this year was extremely optimistic. Then the turmoil in North Africa, and under pressure from what’s going on in Japan, the whole tenor of the market reversed.”

Production ‘Trickle’

Oil production in Libya fell to a “trickle” as fighting between rebels and soldiers loyal to Muammar Qaddafi forced companies to suspend operations, the Paris-based International Energy Agency said. The country pumped 1.6 million barrels a day in January, about 1.8 percent of global production.

Silver jumped about 20 percent during the quarter, trading at the highest level since 1980. Lean hogs gained on speculation of increased demand for U.S. pork supplies from Japan after elevated levels of radioactivity were discovered in milk and vegetables in parts of the country.

Raw sugar futures, wheat and rice all declined. Copper slid on the London Metal Exchange, and gold for immediate delivery advanced 0.8 percent to $1,432.30 an ounce, after reaching a record $1,447.82 March 24.

Emerging Markets

In emerging markets, Hungarian stocks were the best performers, with the BUX Index gaining 8 percent. The forint appreciated 9.8 percent against the dollar as the government promised to reduce spending and delay tax cuts.

Russia’s Micex Index jumped 7.4 percent as investors bet the world’s biggest energy exporter would benefit from gains in oil. Holders of ruble-denominated bonds earned 10.4 percent in the quarter, the strongest performance since the second quarter of 2009 and topping the 1.8 percent average for emerging markets, according to the JPMorgan Chase & Co. GBI-EM Unhedged Index. The MSCI Emerging Markets Index advanced 1.7 percent.

The first quarter “could be split down the middle with roughly the first 45 days representing an attempt to get exposure across that board and the final 45 days being a period of correction and consolidation,” said Michael Shaoul, chairman of Marketfield Asset Management, which oversees $1 billion in New York. “There have been some dramatic headlines accompanying this latter period, but for the majority of the U.S. equity market they strike us as fairly irrelevant.”

To contact the reporters on this story: Grant Smith in London at gsmith52@bloomberg.net

To contact the editor responsible for this story: Stephen Voss on sev@bloomberg.net