Commodity ETFs Reveal Growing Demand Fears in a Slowing China

Commodity ETFs could be in for a slump as the coronavirus slows China’s economy, the second-largest in the world, and diminishes demand for all the raw materials needed to keep the country running normally.

Over the past week, the Invesco DB Optimum Yield Diversified Commodity Strategy Portfolio (NasdaqGM: PDBC) declined 5.9% and iShares S&P GSCI Commodity-Indexed Trust (NYSEARCA: GSG) decreased 7.0% on the weakening demand outlook in the wake of the virus outbreak.

Fears of the economic impact sent energy, base metals, and grains futures down while safe-havens like gold strengthened. In a normal year, traders would typically expect the demand to slow during the traditional Lunar New Year holiday that started last week, but with the government extending the holiday break and the coronavirus outbreak in full force, the outlook on demand looks bleak.

“We should short everything,” Jia Zheng, a portfolio manager at hedge fund Shanghai Minghong Investment Management Co., told Bloomberg. “With the spread of the epidemic, the domestic consumer market will shrink sharply, and construction will be delayed after the holiday.”

Crude oil prices have pulled back on speculation the reduced travel and industrial activity will weigh on fuel demand. While Goldman Sachs Group Inc. already predicted global oil demand would take a hit, OPEC behemoth Saudi Arabia to stated it saw very little impact on consumption so far.

“For now it is primarily a matter of confidence getting hit but a prolonged outbreak, combined with a continued spreading, will alter the way people travel and commute,” Ole Hansen, head of commodity strategy at Saxo Bank A/S, told Bloomberg. “A supply glut of fuel in China would filter through to the rest of the world through exports, and on that basis, the market is reacting in this defensive manner.”

Metals that are closely linked to China’s industrial activity are also taking a beating, with copper experiencing one of its worst declines since 2014. However, gold has shined through as a safe-haven play or a doomsday hedge.

“I always own gold, especially when risks are high and interest rates are low and I will up those allocations,” Stephen Innes, chief market strategist at AxiCorp. told Bloomberg. “Until I get something that hits me in the face telling me to buy this stuff, I will not. The fear factor is manifesting.”

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