The commodity complex continues to struggle on the heels of intensifying trade wars between the world’s two largest economies: the United States and China. On Tuesday President Trump released a list of Chinese goods valued at $200B that may be subject to a new 10% tariff.
This follows the $50B in tariffs announced in June, and the subsequent $34B in retaliatory tariffs announced by China. While the new list includes many manufactured products such as water boilers and airplane tires, it also includes a number of raw commodities, including cotton, steel, aluminum, and agricultural products such as orange juice.
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The result of the tariff announcements continues to be distinct selling not only across the specific materials mentioned above but further across the entire commodity spectrum. For the week (7/9/2018 – 7/13/2018), the commodity complex finished lower by 2.2%.
Fund Algorithms Wreak Havoc
Certain hedge funds and exchange-traded funds which are designed to invest across the broad commodity space must maintain weighted allocations to the entire sector. When the value of one commodity falls, these funds must then sell their other unrelated commodities to keep their stated fund allocations in proper alignment.
The US / Chinese trade wars are thus taking a toll not only on the specific products listed above but the entire commodity sector, including precious metals.
We generally measure the commodity complex via the CRB Index, which includes an average of 19 raw materials including the energy, metals, and the agricultural spectrum. Below we see that the recent selling across the sector has resulted in a violation of the short-term rising trend which began in July 2017 (turquoise color):
