The rebounding U.S. dollar and concerns about China, the second largest world economy, are dragging down commodities prices and related exchange traded funds.
Since the Monday close, the PowerShares DB Commodity Index Tracking Fund (NYSEArca: DBC) dipped 2.2%, iPath Dow Jones-UBS Commodity Index Total Return ETN (NYSEArca: DJP) fell 2.3% and iShares GSCI Commodity-Indexed Trust (NYSEArca: GSG) declined 1.8%.
The recent ell-off corresponded with jump in the U.S. dollar, with the PowerShares DB U.S. Dollar Index Bullish Fund (NYSEArca: UUP), which tracks the price movement of the U.S. dollar against a basket of currencies, gaining 2.3% so far this week.
Investors who want to capitalize on a continued fall in the commodities market can take a look at the ProShares UltraShort Bloomberg Commodity (NYSEArca: CMD), which takes the daily -2x or -200% performance of the Bloomberg Commodity Index. However, potential traders should use limit orders to better control trades as the ETF shows relatively low activity.
The S&P GSCI Index, which tracks 24 commodities, experienced its largest one-day drop in over a month and end its lowest since April 28 on Tuesday, reports Ira Iosebashvili for the Wall Street Journal.
The commodities space had been experiencing a decent rebound, led by crude oil prices, as a faltering USD pushed short-term investors to acquire raw resources on the cheap.
However, the sudden surge in the greenback reversed sentiment in the commodities space – a stronger dollar weighs on commodity prices since the market is priced in the USD, which makes it more expensive for foreign buyers when the dollar appreciates.
Additionally, many observers argued that the recovery in commodities would only be short-term since supplies remain robust and demand is still soft in weaker economies across Europe and Asia.
Some also point out that data from China have fueled concerns about demand for commodities. For instance, the average price of new homes in 70 Chinese cities declined for an eight month in a row – construction and sale of new homes are used as a gauge of economic well-being and commodities demand.
“We have come to a pause in the commodities rally,” George Gero, a senior vice president with RBC Capital Markets Global Futures, said in the WSJ article. “Some people are taking the opportunity now to lock in profits.”
For more information on the commodities space, visit our commodity ETFs category.
Max Chen contributed to this article.