Commodity-related exchange traded funds have been under pressure and have experienced a steep plunge in recent sessions as market watchers grow concerned over softening demand in China for construction materials.
The PowerShares DB Commodity Index Tracking Fund (NYSEArca: DBC), the largest broad commodity-related ETF, has declined 6.8% over the past month and fell 10.0% year-to-date.
Dragging on the commodities outlook, traders are wary of falling demand out of China, the second largest economy in the world, due to weaker manufacturing data and recent moves by Chinese regulators that could curb growth in areas like housing and infrastructure, the Wall Street Journal reports.
Consequently, materials like iron ore and steel have experienced steep declines over concerns over the health of the Chinese economy.
“There has been a visible shift of sentiment in the financial market,” Sun Yonggang, an analyst at Chaos Ternary Futures Co., told the WSJ. “Over 80% of the steel traders we talked with were upbeat about the outlook in the first quarter. But now they have all turned pessimistic.”
Meanwhile, crude oil suffered through a tough week, falling to their lowest levels since mid-November. The oil markets, though, may find better guidance later this month when the Organization of Petroleum Exporting Countries come to a decision on whether to extend and possibly increase cuts.
Traders have been selling crude on doubts over the current production caps and the oil cartel’s ability to put a dent into the global oil glut that has pressured prices since 2014. Global oil inventories are still near topped out and American shale-oil producers have ramped up production in the wake of OPEC cuts.
“OPEC’s failure to raise oil prices is fundamentally linked to their failure to bring down petroleum inventories,” Bernstein Research said in a report.
Further dampening the oil outlook, China could be buying less than previously expected due to a new rule announced last week that the country will no longer accept applications from privately owned refineries, or so-called teapots, for the right to import crude.
If commodity traders fear that the weakness will persist, there are a number of inverse ETFs that hedge against falling commodities. For instance, the DB Commodity Short ETN (NYSEArca: DDP) takes the simple short position on a group of diversified commodities. The DB Commodity Double Short ETN (NYSEArca: DEE) takes the two times the inverse position on a basket of commodities.
For more information on the commodities market, visit our commodity ETFs category.