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As signs of a global economic slowdown became increasingly clear, investors downgraded demand expectations for most commodities.
Macro Outlook: Investors’ Sentiments Weigh on Commodities’ Road to Recovery
The UBS Constant Maturity Commodity Index (CMCI) and other commodity index strategies slumped during the month of September. The continued aggressive tightening of the U.S. Federal Reserve (FED) and the resulting U.S. dollar strength weighed on investors’ sentiments. As signs of a global economic slowdown became increasingly clear, investors downgraded demand expectations for most commodities.
CMCI declined by 5.5% in September but remains up 8.4% year-to-date. The Bloomberg Commodity Index (BCOM) declined by 8.1% in September and remains up 13.6% year-to-date. U.S. natural gas continues to be the most important factor driving the difference in relative CMCI vs BCOM performance. By index design, CMCI rebalances individual commodity exposures back to target weightings monthly. BCOM, by index design, only rebalances exposures annually. CMCI’s monthly reweighting methodology has reduced volatility and improved relative performance vs BCOM. This year, however, it has detracted from relative performance. BCOM ended September with an approximately 18% weighting to U.S. natural gas while CMCI ended September with its reweighted target exposure of 3.5% to U.S. natural gas. U.S. natural gas was the primary reason for CMCI’s positive relative performance in September vs BCOM and is also the primary reason for the year-to-date underperformance vs BCOM.
Index & Sector Review: Energy Struggles from Falling Natural Gas Prices
The energy sector was the worst-performing sector in September; overall, down by 11%. U.S. natural gas led the sector decline, falling 20%. WTI and Brent crude oil fell 10% in the month. Natural gas peaked at the end of August when Russia shut down the gas flowing through the Nord Stream 1 pipeline. Despite the destruction of the Nord Stream 1 and 2 pipelines in September, natural gas prices declined sharply from the late August peak in September. This was a classic example of “buy the rumor, sell the news” trading action.
The industrial metals sector fell 4.7%, led by a 6.7% decline in aluminum prices. The industrial metals sector is considered the most economically sensitive sector. Rising U.S. interest rates and the strong U.S. dollar have pressured the sector throughout the month.
Agriculture fell 1.6% in September, led by a 23% decline in cotton prices, which was offset by a 9% jump in wheat prices. The Russia-Ukraine war continues to support wheat prices. Livestock prices fell 4.2%, led by a drop of 8.5% in lean hog prices. Precious metals fell 1.3%, led by a 1.2% decline in gold and partly offset by a 6.6% rally in silver prices.
Roll Yield Estimates
Bloomberg as of September 30, 2022.
Disclosures
Source: VanEck as of September 30, 2022.
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