Commodities Market Upturn Ahead Following Slump?
June 15, 2023
Read Time 3 MIN
Macro Outlook: China’s Lackluster Recovery Triggers Commodities Decline in May
China’s disappointing recovery following the COVID-19 reopening this spring has been the major reason for the declining commodities markets in May. The UBS Constant Maturity Commodity Index (CMCI) declined 5.78% and the Bloomberg Commodity Index (BCOM) declined 5.64%. Additionally, the U.S. Federal Reserve’s tightening cycle over the last year is expected to slow the U.S. economy this summer and fall.
All five sectors of CMCI declined during May. The energy and industrial metals sectors both fell about 7%, the agriculture sector was down 4%, the livestock sector fell by 3%, and the precious metals sector declined by 2%. Remarkably, a handful of commodities were up in May: cocoa, HRW (hard red winter) wheat, and live cattle.
Sector Review: Industrial Metals Were the Weakest Link
The industrial metals sector was the weakest sector during the month; LME (London Metal Exchange) Nickel and LME Zinc fell by over 14%. The LME launched two consultations recently on possible reforms in the wake of the nickel trading crisis in 2022. Both consultations are due to close in June and July of this year. Zinc’s slump is a result of China’s post-lockdown bounce-back, which has been lackluster.
The declines in the energy sector were consistent among the respective commodities; unleaded gas fared better than the rest with losses of less than 4%. Macroeconomic concerns were a major driver of crude oil prices as analysts expect oil to trade at around $80 per barrel. However, threats of possible production cuts from OPEC+ (Organization of the Petroleum Exporting Countries) in June will be in place as long as oil stays significantly below $80 per barrel, further impacting future prices.
Although the agriculture sector was down 4%, it was spared from worse losses with cocoa gaining around 4% and HRW wheat around 2%. The looming El Niño phenomenon has much of the agriculture sector on alert. Anticipated disruptions in the global supply chain of agricultural products due to heavy rainfall or droughts could cause crop losses, shipment delays and/or difficulty harvesting for key crops like wheat, corn and oilseed.
While live cattle climbed around 3%, lean hogs declined by almost 12%. Since the target weight in the index was less than 2%, the losses to the livestock sector were only 3%.
The precious metals sector losses were primarily from silver which was down 6%, while gold was down 1.3%, contributing to the overall loss in the sector by 2%.
Looking at the YTD estimated roll yield below highlights CMCI’s superior roll methodology and curve positioning. By maintaining a constant maturity and longer average duration, CMCI is generating positive roll yield and BCOM is generating negative roll yield.
Roll Yield Estimates YTD - May 2023
Source: Bloomberg. Data as of May 2023. Past performance is no guarantee of future results. Index performance is not illustrative of fund performance. It is not possible to invest in an index.
Learn more about the VanEck CM Commodity Index Fund, which seeks to track, before fees and expenses, the CMCI.
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Disclosures
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned are unknown. 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 other 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.
The UBS Bloomberg Constant Maturity Commodity Index (CMCI) 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.
Bloomberg Commodity Index (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 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. An investment in the Fund may be subject to risks which include, but are not limited to, risks related to active management, commodities and commodity-linked derivatives, commodity regulatory, credit, derivatives counterparty, derivatives, government-related bond, index tracking, industry concentration, investments in money market funds, interest rate, LIBOR replacement, market, operational, and subsidiary investment risk, all of which may adversely affect the Fund. 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.
© 2023 Van Eck Securities Corporation, Distributor, a wholly-owned subsidiary of Van Eck Securities Corporation.
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Disclosures
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned are unknown. 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 other 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.
The UBS Bloomberg Constant Maturity Commodity Index (CMCI) 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.
Bloomberg Commodity Index (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 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. An investment in the Fund may be subject to risks which include, but are not limited to, risks related to active management, commodities and commodity-linked derivatives, commodity regulatory, credit, derivatives counterparty, derivatives, government-related bond, index tracking, industry concentration, investments in money market funds, interest rate, LIBOR replacement, market, operational, and subsidiary investment risk, all of which may adversely affect the Fund. 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.
© 2023 Van Eck Securities Corporation, Distributor, a wholly-owned subsidiary of Van Eck Securities Corporation.