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Emerging Market Weakness Drags on Commodity ETFs

This article was originally published on ETFTrends.com.

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 (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.”

On the supply side, emerging market producers have been trying to ramp up production to capitalize on the stronger dollar.

“As you devalue currencies in emerging markets, many of which are natural resource producers, they are going to try and ramp output as they get paid in dollars for commodities,” Doug King, manager of Merchant Commodity Fund, told the Financial Times. “So the currency moves both add more commodities supply while also raising a big question mark over demand.”

According to the Bloomberg Industrial Metals Index, industrial metals prices plunged 19% from its peak in April, closing in on a bear market. Copper prices recently hit its lowest level since July 2017.

Access to capital has also dried up in China, fueling concerns over future demand for raw materials. John Browning, managing director of Hong Kong futures broker Bands Financial, told FT that corporate clients he speaks to are finding access to credit difficult and are “having a tough time”, and contributed to the heavy selling of copper futures.

For more information on the commodities market, visit our commodity ETFs category.