Commodities React to Interest Rate News
September 15, 2022
Read Time 2 MIN
Macro Outlook: Inflation Drags on Commodities Recovery
Commodities continued to recover from the July lows for most of August, but finished the month on a weak note. The UBS Constant Maturity Commodity Index (CMCI) finished the month down about 1%, but continues to hold strong year to date, at about 15%. The late month pullback was caused by Jay Powell’s hawkish Jackson Hole speech. The market was expecting a hawkish tone from the speech, but was surprised by the “higher for longer” interest rate comments. Most investors had been expecting a quick pivot by the U.S. Federal Reserve (Fed) next year and a return to rate cuts. Jay Powell made it very clear that the Fed will continue to raise rates aggressively this year and keep them higher for an extended period of time. This change in the interest rate outlook triggered more gains in the U.S. dollar and a pullback in commodity prices at month end.
Index & Sector Review: Energy Demands Hold Steady Due to Natural Gas Price Woes
The Russia–Ukraine war continues to keep European natural gas prices elevated, which in turn drove U.S. natural gas prices higher in the month of August. Putin has now shut down the gas flowing to Germany through the Nord Stream pipeline indefinitely.
CMCI again lagged the Bloomberg Commodity Index (BCOM) during the month because of BCOM’s large and overweight position in U.S. natural gas. BCOM exposures are not re–weighted during the year, effectively letting their winners run. BCOM now has over 10% of its exposure in U.S. natural gas compared to CMCI’s re–weighted 3% exposure. Over the long term, we believe that CMCI’s monthly re–weighting may produce relative outperformance, but this year it is definitely causing the underperformance relative to BCOM.
From a sector perspective, only agriculture and livestock finished the month positively. Agriculture was up 1% while livestock was up 3.5%. The agriculture sector was led by strong gains in cotton over concerns around this year’s U.S. crop due to weather. Both cattle and hogs were higher in August.
For the month and year to date, the precious and industrial metals sectors were the weakest.
Learn more about the VanEck CM Commodity Index Fund, which seeks to track, before fees and expenses, the CMCI.
Please note that VanEck may oﬀer investments products that invest in the asset class(es) or industries included in this blog.
This is not an oﬀer to buy or sell, or a recommendation to buy or sell any of the securities/ﬁnancial instruments mentioned herein. The information presented does not involve the rendering of personalized investment, ﬁnancial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reﬂect actual results, are valid as of the date of this communication and subject to change without notice. Information provided by third party sources are believed to be reliable and have not been independently veriﬁed for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its employees.
All indices are unmanaged and include the reinvestment of all dividends, but do not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment in the Fund. An index’s performance is not illustrative of the Fund’s performance. Indices are not securities in which investments can be made. Past performance is no guarantee of future results.
BCOM provides broad–based exposure to commodities, and no single commodity or commodity sector dominates the index. Rather than being driven by micro–economic events affecting one commodity market or sector, the diversified commodity exposure of BCOM potentially reduces volatility in comparison with non–diversified commodity investments.
UBS Bloomberg Constant Maturity Commodity Index is a Total Return rules–based composite benchmark index diversified across 27 commodity components from within five sectors, specifically energy, precious metals, industrial metals, agricultural and livestock.
UBS and Bloomberg own or exclusively license, solely or jointly as agreed between them, all proprietary rights with respect to the Index. In no way do UBS or Bloomberg sponsor or endorse, nor are they otherwise involved in the issuance and offering of the Fund, nor do either of them make any representation or warranty, express or implied, to the holders of the Fund or any member of the public regarding the advisability of investing in the Fund or commodities generally or in futures particularly, or as to results to be obtained from the use of the Index or from the Fund.
Investments in commodities can be very volatile and direct investment in these markets can be very risky, especially for inexperienced investors.
You can lose money by investing in the Fund. Any investment in the Fund should be part of an overall investment program, not a complete program. Commodities are assets that have tangible properties, such as oil, metals, and agriculture. Commodities and commodity–linked derivatives may be affected by overall market movements and other factors that affect the value of a particular industry or commodity, such as weather, disease, embargoes or political or regulatory developments. The value of a commodity–linked derivative is generally based on price movements of a commodity, a commodity futures contract, a commodity index or other economic variables based on the commodity markets. Derivatives use leverage, which may exaggerate a loss. The Fund is subject to the risks associated with its investments in credit, commodities and commodity–linked derivatives, commodities and commodity–linked derivatives tax, counterparty, debt securities, derivatives, index tracking and data, industry concentration, money market funds, management, market, operational, regulatory, repurchase and reverse repurchase agreements, subsidiary risks and U.S. government securities.. The use of commodity–linked derivatives such as swaps, commodity–linked structured notes and futures entails substantial risks, including risk of loss of a significant portion of their principal value, lack of a secondary market, increased volatility, correlation, liquidity, interest–rate, valuation and tax risks. Gains and losses from speculative positions in derivatives may be much greater than the derivative’s cost. At any time, the risk of loss of any individual security held by the Fund could be significantly higher than 50% of the security’s value. Investment in commodity markets may not be suitable for all investors. The Fund’s investment in commodity–linked derivative instruments may subject the Fund to greater volatility than investment in traditional securities.
Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of a Fund carefully before investing. To obtain a prospectus and summary prospectus, which contain this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.
© 2022 Van Eck Securities Corporation, Distributor, a wholly–owned subsidiary of Van Eck Securities Corporation.
December 21, 2022
January 19, 2023
Resource equities exhibited strong relative gains in Q4, outperforming both global equities and bonds. The most important issue for the resource equity sector may be the path to opening in China.
January 13, 2023
CMCI’s index design of monthly rebalancing back to its target weightings paid off at the end of 2022. This helped it outperform BCOM, the industry’s primary benchmark, in December.
December 21, 2022
Equinor, an international energy company, is one of the best-positioned companies to transition to a low-carbon future, in our view.