COMMODITIES-Biggest 2012 rally as EU acts but Q2 in the red

Fri Jun 29, 2012 12:58pm EDT

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(Updates prices; changes byline and dateline, pvs LONDON/SINGAPORE)

* Rally after EU acts to lower Italy, Spain borrowing costs

* Investors, analysts still wary of EU's structural problems

* CRB notches biggest one-day gain since September

* Oil up most since Feb 2011, copper spikes most in 7 months

* Many markets still down for the quarter

By Barani Krishnan

NEW YORK, June 29 (Reuters) - Commodity markets posted their biggest rally for the year on Friday as a debt deal in Europe spurred investors to scoop up beaten-down oil and metals futures at the end of the worst quarter for raw materials since September.

European leaders agreed on a deal to cut soaring borrowing costs in Spain and Italy, boosting sentiment on the last trading day of June.

Oil futures jumped as much as 6 percent for the day, the biggest gain in a session since February 2011. Copper had its biggest one-day rally in seven months, and gold its largest run-up since the start of June.

Corn, soybean and wheat prices powered to new highs too, extending this month's unexpected rally on fears that hot, dry weather was decimating crops in the U.S. Midwest.

The across-the-board surge lifted the Thomson Reuters-Jefferies CRB index by about 3 percent, putting it on course to its best performance for the day since September last year.

The last minute rally saved the quarter ending as the worst since the onset of the financial crisis in 2008. Instead, the CRB showed a 9 percent drop for its poorest showing since the third quarter of 2011.

Oil was the worst hit in the quarter with a loss of more than 20 percent.

Some investors and analysts remained cautious about the third quarter, saying the EU deal fell short of fixing structural problems in the euro zone crisis that still left markets vulnerable to violent shocks if the region's debt situation took another nasty turn.

"Only when you have structural fixes can you think about a third quarter that will look a lot more positive," said Pau Morilla-Giner, who runs London & Capital's $280 million Global Commodities Fund.

"At the moment, it's still very uncertain. I actually see no reason to be very excited about it."

Responding to pleas from Spanish and Italian leaders, who had threatened to block a package of growth measures, the euro zone agreed that its rescue funds could be used to stabilize bond markets without forcing countries that comply with EU budget rules to adopt extra austerity measures or economic reforms.

But many details had yet to be worked out and leaders appeared at odds over just how strict the conditions attached to any assistance should be.

The euro headed for its best day against the dollar in eight months after the deal, making dollar-denominated commodities such as oil even more attractive to euro holders.

U.S. crude oil jumped nearly $5 to a session high above $82 per barrel, after losing more than $8 from the beginning of June through Thursday.

London's Brent crude oil rose more than $4 to an intraday peak above $95 per barrel. It had slid more than $10 earlier in the month.

"I think the expectation was it would take the EU most of the weekend to reach an agreement, so I think this has taken the market a bit by surprise," Thorbjoern Bak Jensen, oil analyst at Global Risk Management, said, describing the outsized move.

Copper's benchmark three-month month contract in London jumped nearly 4 percent, or more than $300, to a one-month high above $7,690 a tonne.

Aside from the euro zone deal, copper also got a boost from a policy decision by China, the world's top consumer of the metal, that favored commodity investors. China's central bank said it would use a basket of policy tools to keep credit and money supply growth at a steady and reasonable pace.

While copper rose for the day, it was still down nearly 11 percent on the quarter, on course for its worst performance since the third quarter of 2011. For the year, the metal showed a 20 percent loss.

Gianclaudio Torlizzi of T-Commodity were among analysts who were unconvinced that copper had not seen its bottom, saying the potential for an improved economic picture from the EU deal "has given funds a pretext to pile up on metals".

Gold rose 3 percent, with the spot price of bullion scaling a one-month high of $1,600 an ounce.

For the quarter, though, bullion was on track to a loss of more than 4 percent, its biggest quarterly drop since the three months to September 2008. (Additional reporting by Eric Onstad in London and Manolo Serapio Jr in Singapore; Editing by Marguerita Choy)

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