Commodities’ July Recovery Offsets June Losses
August 16, 2022
Read Time 2 MIN
Macro Outlook: Downgraded Economic Growth Expectations Reduced Commodity Demands
July was a mixed month for commodities after the sharp pull back in June. The decline, which continued in early July, revealed the downgrade of investors’ economic growth expectations. The U.S. Federal Reserve’s commitment to aggressively raising interest rates in order to control inflation reduced commodity demand forecasts.
Year to date returns for commodity index products, as well as roll yields, are still very positive due to the steep backwardation of the forward price curves, especially in the energy sector.
CMCI Roll Yield is Still Positive Despite Q2 Setbacks
Source: VanEck, Bloomberg. Data from 12/31/21 – 7/31/22. Roll yield refers to the profit or loss that can be generated when investing in the futures market due to the price difference between futures contracts with different expiration dates. Past performance does not guarantee future results.
Index & Sector Review: Energy Driven by Rally in Natural Gas Prices
The energy sector led during the month of July, providing almost all of the positive performance due to a strong rally in natural gas prices. Heat waves in Europe and the U.S. caused drawdowns in natural gas inventory. Russia continued to manipulate the sector with the Nord Stream 1 gas pipeline into Europe. They initially reduced the flow down to 40% of its normal supply and then closed the pipeline for normal maintenance, leading to fears that it would remain closed. They then opened it back up to 40%, only to turn it down to 20% a few days later. Russia has clearly started to use energy as a weapon against the NATO alliance.
The livestock sector was also strong in late July. The heat wave from late June into early July in the lower Midwest U.S. killed cattle, quickly reducing supply. However, both cattle and hogs rallied into the month end.
The industrial metals sector was unchanged for the month after a sharp decline in June as the Chinese economy continued to underperform.
The agriculture sector prices declined for most of July, finishing down for the month due to improved growing conditions in the upper Midwest U.S. Precious metals also declined as U.S. real interest rates rose and the U.S. dollar made new highs for the year in July.
The UBS Constant Maturity Commodity Index (CMCI) underperformed the Bloomberg Commodity Index (BCOM) by approximately 4% in July. The underperformance was almost entirely due to BCOM’s larger natural gas exposure relative to CMCI. CMCI made its low for the correction in mid-July and recovered into month end, finishing flat for the month.
Target Weights and Index Rebalancing
The annual rebalancing of CMCI for the 2022-2023 period was announced on July 26th. There were no commodities added or removed from the index; only slight adjustments in the Precious Metals and Energy sectors.
Index Sector Weightings
Source: MerQube. As of July 26, 2022.
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