Emerging Market Weakness Drags on Commodity ETFs

While the emerging equities were falling into a bear market, commodity prices and related exchange traded funds were also dragged down by the weakness in the developing economies.

Over the past three months, the PowerShares DB Commodity Index Tracking Fund (NYSEArca: DBC), the largest broad commodity-related ETF, fell 7.3% and the iShares S&P GSCI Commodity-Indexed Trust (NYSEARCA: GSG) declined 6.7%. Nevertheless, commodities remain positive for the year, with DBC up 1.2% and GSG 3.3% higher year-to-date.

Among the key worries in the commodities space, China, the world’s largest consumer of raw materials from metals to fuels, is showing signs of slowing down, and other emerging economies are also beginning to exhibit weakness as well. Traders also argue that the lower economic growth in emerging countries could quickly cool demand for commodity-intensive exports out of China, the Financial Times reports.

Meanwhile, the strengthening U.S. dollar has made it more expensive for foreign buyers to acquire commodities. The Dollar Index (DXY), which tracks the USD’s moves against a basket of major developed currencies, advanced 4.2% year-to-date to 95.9.

“A bitter cocktail of events has come together,” Mark Hansen, head of commodities trader Concord Resources, told the Financial Times. “People’s future demand expectations have changed materially.”