Index reshuffle will boost commodities

Technical changes, such as rejigging an index, can play an important part in setting commodities prices.

We tend to think of asset prices as being driven by supply and demand. But sometimes technical changes, such as rejigging an index, can play an important part in setting prices. Indices tend to be tweaked from time to time to ensure they don't get skewed towards components that have done well and thus increased their weighting; similarly, if a component has done badly, its quota may be topped up to ensure the weightings continue to conform to the index's mandate.

Two major tradable commodities indices, the S&P GSCI and the Bloomberg Commodity index, with total assets invested of $60bn and $65bn respectively, are a case in point. They will be reshuffled in early January. Commodities that have done badly over the past year will be bought, and outperformers sold. The upshot is that "the upward impact on nickel prices could be significant", says Societe Generale's Mark Keenan.

To ensure they are following the index's weightings, funds will have to buy the equivalent of 22% of average daily market volumes during the week. It's similar for lean hogs, while around half as much sugar will need to be sold. The rebalancing process will have "a material impact on prices and sentiment", says SocGen.

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