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.

Recommended

The charts that matter: the start of the big crash?
Global Economy

The charts that matter: the start of the big crash?

US tech stocks fell further this week, more than 10% down on their November high. There’s what happened to the charts that matter most to the global e…
22 Jan 2022
Oil price hits seven-year high after Abu Dhabi attack
Oil

Oil price hits seven-year high after Abu Dhabi attack

The oil price hit a seven-year high after Houthi rebels in Yemen staged a drone attack on an oil storage site in Abu Dhabi.
21 Jan 2022
Industrial metals: electric vehicles are driving a boom in prices
Industrial metals

Industrial metals: electric vehicles are driving a boom in prices

The soaring popularity of electric vehicles is pushing up the price of the industrial metals that make up the batteries.
21 Jan 2022
What will happen to the price of gold in 2022?
Gold

What will happen to the price of gold in 2022?

Gold is traditionally the go-to asset during inflation. But with inflation at 30-year highs, it has gone nowhere. Dominic Frisby investigates why, and…
20 Jan 2022

Most Popular

Ask for a pay rise – everyone else is
Inflation

Ask for a pay rise – everyone else is

As inflation bites and the labour market remains tight, many of the nation's employees are asking for a pay rise. Merryn Somerset Webb explains why yo…
17 Jan 2022
Shareholder capitalism: why we must return power to listed companies’ ultimate owners
Investment strategy

Shareholder capitalism: why we must return power to listed companies’ ultimate owners

Under our system of shareholder capitalism it's not fund managers, it‘s the individual investors – the company's ultimate owners – who should be telli…
24 Jan 2022
Interest rates might rise faster than expected – what does that mean for your money?
Global Economy

Interest rates might rise faster than expected – what does that mean for your money?

The idea that the US Federal Reserve could raise interest rates much earlier than anticipated has upset the markets. John Stepek explains why, and wha…
6 Jan 2022